News & Observer, The (includes Chapel Hill News) (Raleigh, NC)The News & Observer
July 15, 2001
Betty Lou Baker isn’t responsible for the decisions by Lumberton and 50 other North Carolina cities and towns to buy overpriced nuclear power plants. But she and 735,000 other people are paying for those choices.
Baker buys electricity from the City of Lumberton, where the average power rate for residents is about 50 percent above the state average. She says she has to choose between paying her light bill and paying her rent, between paying her light bill and eating.
"When you have nothing, you have to put up with a lot," she said.
Baker, who is 39 and disabled, is a small part of a big story that she and most other people in North Carolina know little about. Like California, this state has its own power scandal. It’s called ElectriCities, and it has been bubbling on the back burner for 20 years. Its ingredients include bad luck, bad leadership and a whopping debt.
If these cities were businesses, competing in the open market, they would be bankrupt. They owe $5.4 billion – five times what their nuclear and coal plants are worth. To make the debt payments, they must charge residential and business rates that average 20 percent to 25 percent above ! those of Duke Power and CP&L, the state’s two biggest investor-owned utilities. Over a year, the difference is about $240 for the average household.
The cities had a chance last year to shift most of their debt to the rest of the state and, in three years, reduce their rates to the same level as Duke and CP&L. In return, the cities were asked to sell their interests in plants and their distribution systems, and get out of the power business.
They said no. Now the opportunity for rate parity has passed, and the cities’ customers remain stuck with their high power bills.
The gap is going to grow. Over the next few years, the cities must raise their rates even more to keep up with their payments.
Part of this story has been told over the past 3 1/2 years in testimony before a legislative commission studying deregulation of the electric industry in North Carolina. The News & Observer pieced together the rest by examining thousands! of pages of documents, some from as far back as the 1960s, an! d interv iewing 65 people.
Back in the business:
The 51 cities that borrowed and bought range in size from Bostic in Rutherford County, population 328, to Greenville, Gastonia and High Point, the largest of the electric cities, with a population of 85,839. Some cities have been in the power business for more than 100 years, longer than Duke and CP&L.
For most of those years, the power business was a blessing. When a utility is city-owned, the jobs stay in town and so do the "profits," which the cities have used to pay for other expenses and to hold down property tax rates.
In the early years, many of the cities generated power at their own plants. Over time, however, they sold or closed them because it was cheaper to buy power wholesale from CP&L, Duke or another utility. In the 1960s and early ’70s, city leaders concluded that they could get a more reliable source of power and increase profits by getting back into the producti! on business – either by building plants or buying into those owned by utility companies. Duke Power and CP&L, predictably, resisted.
In testimony, in publications, and on the Web site of ElectriCities of North Carolina Inc., the public agency that represents them, the cities have tried to make themselves look like the Good Samaritan – coming to the rescue of CP&L and Duke, raising capital the two companies needed to finish building nuclear plants near Raleigh and Charlotte.
But there was more to it than that.
State Sen. David W. Hoyle, recalls a meeting of electric cities leaders in Southern Pines in the early 1970s, where he said there was talk of suing CP&L and Duke to force them to sell interests in their plants. Hoyle, 62, was then the young mayor of Dallas, a town about 20 miles west of Charlotte.
"First thing that caught my eye, I saw all these people coming in, and they had hand carts just stacked with papers – I mean h! and truck after hand truck."
The papers, he said, wer! e copies of lawsuits the cities intended to file against Duke and CP&L.
"I just kind of stood and raised my hand, I said, ‘Let me ask y’all a question. Now, you’re asking us to go borrow money’ – I used the term ‘hock our distribution lines’ – ‘and then you want me to go home and … tell the people we’re going to put our distribution system at risk, borrow a bunch of money and sue the biggest taxpayer we got?’ I said, ‘Dallas is not interested. I’m leaving.’ "
Today, Hoyle approaches the issue from a different perspective – as co-chairman of the commission that has struggled to find a solution to the debt he walked away from 30 years ago.
Ultimately, 51 of the cities formed municipal power agencies – one for 32 cities in the east and one for 19 cities in the west – and bought interests in generating plants from the two utilities. Dallas and 22 other electric cities decided to stay out, and their caution has been rewarded. Residential power rates in Da! llas, for example, are lower than in 49 of the 51 cities that bought into the plants.
Buying their way in:
Duke and CP&L kept saying ‘No’ to the cities until after the Arab oil embargo of 1973 and the ensuing energy crisis and recession.
Those tough economic times drove first Duke, then CP&L, into the electric cities’ arms, in part because cities can borrow money at lower interest rates than utility companies can. Buyers of municipal bonds are willing to accept a lower interest rate – about 2 or 2.5 percentage points – because interest on municipal bonds is tax-exempt.
When North Carolina Municipal Power Agency No. 1, which represents the western cities, announced in February 1978 that Duke had agreed to sell the agency a 75 percent interest in a unit under construction at its Catawba Nuclear Station, the press release didn’t say anything about rescuing Duke. It talked about making money. The agency said the deal woul! d save the cities’ customers about $1.5 billion.
But ! early th e next year, on March 28, 1979, the roof fell in on the nuclear power industry. At 4 a.m. that day, a series of mechanical and human errors caused a partial meltdown of a reactor core at the Three Mile Island Nuclear Power Station near Harrisburg, Pa. Only a small amount of radioactive gas escaped into the atmosphere, but the accident threw a fright into the public.
Twenty-two years later, the nuclear power industry has yet to recover.
The U.S. Nuclear Regulatory Commission responded with hundreds of new rules for building and operating nuclear plants. Those regulations, and vigorous opposition by nuclear power opponents, slowed, and finally ended, construction of nuclear plants in the United States for a generation.
The accident cost the western cities and Duke dearly, helping to increase the cost of the Catawba plant by more than 150 percent, according to the cities.
Even so, the eastern electric cities were champing at the bit for a dea! l of their own with CP&L, in part to stabilize the cost of the power they were buying. Adjusted for inflation, the wholesale rate that CP&L charged them rose about 85 percent from 1970 to 1980.
The warning signs abounded: It was taking longer and costing more to build nuclear plants; the demand for more power had slowed; and all over the country scores of plants already had been canceled. But the eastern cities blasted ahead.
"I will never understand that," said Smith D. Lingerfelt of Shelby, who was a leader of the western cities. "Somewhere somebody had blinders on."
The eastern cities announced details of their deal with CP&L in July 1981. CP&L agreed to sell parts of two nuclear plants – a 16 percent share in Shearon Harris Nuclear Plant in Wake County and an 18 percent share of Brunswick Nuclear Plant near Southport – and two coal-fired plants. The cities called it a "historic accomplishment" that would save them more than $1.! 75 billion by 2003.
William H. Batchelor, then the ci! ty manag er of Rocky Mount, was one of three men appointed by the eastern agency board to oversee the negotiations with CP&L.
"When we closed that deal in New York one night at midnight, I thought we had made a hell of a deal for our customers," he said, but he added: "We never anticipated that kind of debt burden."
Shearon Harris ended up costing $3.9 billion, roughly twice the original estimate.
By the late 1980s, the magnitude of the debt problem should have been clear. And that wasn’t the only problem. Demand for electricity had grown more slowly than expected, forcing Duke and CP&L to cancel plans to build additional nuclear units. That left the cities owning interests in the two most costly power plants serving the state – a major competitive disadvantage.
Still, no one seemed concerned, at least publicly.
"Some of us knew dang well we had a debt issue. … We’ve got trouble on the horizo! n, OK? But this went in one ear and out the other of the cities," said Lingerfelt, who was energy services manager in Shelby until his retirement in April. Lingerfelt served 12 years on the western agency’s board and was chairman of ElectriCities in 1999.
Without a doubt, the increased cost of building the Catawba and Shearon Harris plants – and the additional interest the cities had to pay on their loans because of construction delays – are the major reasons the cities’ debt got out of hand. But former State Treasurer Harlan E. Boyles says the cities made the problem worse by failing to raise their rates fast enough and use that additional income to pay down the debt.
"Instead of raising the rates, as we should have, … we waddled along," said Boyles, who retired last December after 24 years in office.
That wasn’t the only mistake.
To hold down their debt payments in the early years, both power agencies structured their debts so they pa! id almost nothing on the principal. During the first 12 years,! only 1. 9 percent of all payments went to pay principal, according to figures supplied by ElectriCities.
While the cities were borrowing to make interest payments – including $774 million after the plants were on line and generating income – and postponing payments on the principal, they continued to raid their electric funds, just as they had always done, transferring "profits" to their general funds to hold down property taxes. ElectriCities told legislators that transfers were a "relatively small expense," but tens of millions of dollars a year add up. From 1984 to 1999, the 51 towns transferred $968 million, in current dollars, to their general funds.
"The common thought was that the electric revenues will be sufficient to be able to retire this debt, and you will still be able to give a dividend, if you want to call it that, to your consumers," said Batchelor, who was city manager of Rocky Mount for 27 years. "And I think many cities were kind of business-as-u! sual. I’m guilty as anybody. In Rocky Mount we built a very elaborate city hall and paid for it with cash, and that cash came from various utility funds."
In effect, such transfers shift some of the cost of running a city to people who don’t own property.
"In small Southern towns, [it’s] an old trick," said William M. Sutton, town manager of Apex and a former ElectriCities board member. "You get the money from the electricity ratepayers and keep the [property] taxes down."
Apex stopped transferring money out of its electric fund at least 15 years ago, Sutton said.
The cities’ power debts peaked at $6.2 billion in 1993. About 30 percent of that amount was money the cities borrowed to pay interest on money they had already borrowed.
Seeking a bailout:
Then, in the mid-’90s, along came deregulation. The cities saw it as their Get Out Of Debt Free card.
Supporters of deregulation said it would do for el! ectric power rates what it had done for air fares and long-dis! tance ph one bills. Eventually 23 states, driven in part by the fear that Congress would act if they didn’t, passed deregulation legislation. Other states, including North Carolina, began studying the idea.
To the electric cities, deregulation was a tool for unloading most of their debt on the rest of the state.
"That was our plan, that was our strategy," acknowledged John T. Walser Jr., a Lexington city councilman who is chairman of ElectriCities.
On the surface, the cities’ embrace of deregulation seemed foolish – they were in no condition to cut prices and compete for customers with Duke and CP&L.
But the cities’ leaders knew it wouldn’t come to that. In 1975, in the legislation allowing the cities to invest in power plants, the state had pledged to take no action that would harm the cities’ ability to repay the money they planned to borrow. And if North Carolina violated that covenant, by forcing them into a competition that threatened thei! r bondholders, the cities intended to sue the state’s pants off. In other words, North Carolina couldn’t deregulate without coming to grips with the electric cities’ debt problem – presumably with some sort of bailout.
The electric cities leaders got straight to work. In 1995, they consolidated the authority of the two municipal power agencies in ElectriCities of North Carolina Inc., which previously had been just their trade organization. ElectriCities’ 14-member board would be able to make decisions fast and speak with one voice.
They hired a new CEO, Jesse C. Tilton III, and began to push for deregulation. Tilton, who had 24 years of experience in the power business, knew that the power agencies were financially shaky, so he insisted on a severance agreement. ElectriCities would pay him $763,915 if the agencies went bankrupt or sold their interests in the power plants.
"I told these guys I wouldn’t take this job unless that was in there," Tilto! n said.
The cities retained one of the state’s best-c! onnected lawyers – J. Phil Carlton, a former state Supreme Court justice and close friend of then-Gov. Jim Hunt.
Carlton wrote Hunt in December 1996, urging the creation of a deregulation study commission, and setting up a meeting among Hunt and various utility executives, including representatives of ElectriCities, Duke and CP&L. Hunt conferred with legislative leaders, and, in April 1997, the legislature created the Study Commission on the Future of Electric Service in North Carolina.
The story the cities told legislators was as simple as a drumbeat: North Carolina has plenty of power because of the cities’ sacrifice – they helped finish those costly, but much needed, nuclear power plants. (An ElectriCities consultant estimated the cities’ investment had saved Duke and CP&L customers $2.5 billion.) And, out of fairness, the legislature ought to make everybody else help pay their debt.
ElectriCities brought in hired guns to campaign for debt relie! f. In 1995, it spent only $3,724 on outside political consultants and lobbyists. In 1997, the year the legislature set up the study commission, ElectriCities spent $214,000. Last year it spent $466,250 – well over 100 times its 1995 spending.
"I knew it was a lot," said Walser, the ElectriCities chairman. "But when you’re in the middle of a shooting war, you know, you don’t worry about how many bullets you’re gonna use."
Finding money to hire consultants was not a problem.
"You’re talking hundreds of millions of dollars swing and, frankly, the numbers boggle your mind sometime," Walser said. In that context, he said, a $50,000 or $75,000 or $100,000 consultant fee didn’t seem like a lot. Ultimately, those fees were passed along to the cities’ customers.
The legislative study commission first met in November 1997.
Early the next year ElectriCities hired Coopers & Lybrand, an internationa! l consulting firm, to conduct a series of "scenario planning" ! sessions , to tell them what to do and what to say. Tilton said his team met with Coopers & Lybrand about eight times during a four-month period, from January through April 1998.
The bill for that training was $408,481. Tilton said it was worth it.
Meanwhile, ElectriCities continued trying to make friends in the General Assembly. In June 1998, it invited legislators and their spouses to its annual meeting, held the following month at Pinehurst.
"We can offer you a time to rest and relax and recuperate from the legislative session," the invitation said. "Golf and tennis opportunities are available as well as interesting workshops for our members. You are free to do as little or much as you choose at the meeting."
Part of the cities’ strategy was to alarm legislators and push them to an early decision to deregulate.
A memo to ElectriCities board members in the fall of 1998 said that’s how the staff wanted to use a study by John E. Connau! ghton, an economics professor at UNC-Charlotte. ElectriCities paid Connaughton $20,362 to gauge the economic impact if industries left ElectriCities’ towns because of high power rates or high taxes. The study was dated Nov. 16, 1998.
In the memo a few days later, Alice D. Garland, who directed ElectriCities’ lobbying effort, said, "To a certain extent, we want to alarm the identified audience. We want to say that everything is not rosy, as painted by CP&L and Duke, that the cities have problems, their problems will only get worse, and their problems will become the state’s problem. We want industries to come to the Legislature and say, ‘if we don’t get relief, we are leaving.’ "
But in December 1998, ElectriCities got bad news from a poll and focus groups it commissioned at a cost of $50,432. The Mellman Group of Washington, D.C., found that "support for helping the cities and towns repay the municipal bonds is not particularly strong," and that the ci! ties’ argument about having helped Duke and CP&L when they! were sh ort of capital was not proving persuasive.
"Unfortunately, all of our opponents’ arguments are more compelling than our own," The Mellman Group summary report said.
In May 1999, ElectriCities sent a list of "talking points" for city managers to bring up in visits with legislators. One paragraph focused on declining bond ratings of the eastern power agency and five of its member cities:
"There is more pain for the cities," the memo said. "The longer the state waits to … move toward deregulation, the more likely other cities will be downgraded. These downgrades result in higher costs for citizens and businesses."
ElectriCities told the legislative study commission things that would scare a ghost, trying to persuade it to recommend prompt deregulation. ElectriCities said that "a bad deregulation solution or no solution" would double the cities’ electric rates. City finances could be crippled. Economic development, ElectriCities said, was al! ready being hurt and jobs lost.
"Any delay in resolving these issues hurts the cities and the state," ElectriCities said in a January 1999 newsletter to legislators.
In October 1999, the cities got the breakthrough they’d been looking for. Duke and CP&L, abruptly and stunningly, offered a deal at a meeting of the legislative study commission that contained the one element the cities had been looking for all along – a surcharge on the rest of the state to help them pay their debt.
Duke and CP&L proposed that the General Assembly levy a $3 billion surcharge on all electricity customers in the state to bail out ElectriCities. It would mean adding $2 to $3 per month to residential electric bills for 17 years. To raise the rest of the money to pay off the debt, the cities would have to turn over the cash on hand in their municipal power agencies and get out of the electricity business – sell their interest in power generating plants and their d! istribution systems.
In return, the cities’ customers! would g et rate cuts, down to the level paid by customers of the investor-owned utilities.
"When Duke made that offer that day," Lingerfelt said, "we went back to the office at ElectriCities – I was chairman of the board of directors at that time – and I said ‘I don’t know what you gentlemen think, but … this is my opinion, I said. I would say ‘Where are the papers, Mr. Rick Priory?’ "
Priory is chairman, president and CEO of Duke Energy. Duke Power is one of its business units.
Duke and CP&L had proposed the surcharge in response to pressure from legislative leaders. Now what the cities had to do was put their distribution systems on the table – they had to agree to get out of the electric business.
But Lingerfelt had few allies on the 14-member board – he could count on three. Most cities, and a majority of the board members, were determined to stay in the power business.
Boyles, the retired state treasurer, recalled that ElectriC! ities representatives began to say, " ‘Look, we’re not going to give up our systems, period.’ "
ElectriCities’ towering debt grew rapidly when new regulations slowed construction and helped double the cost of building the Shearon Harris Nuclear Plant.