Sometimes the Best Option is to Cut Your Losses and Move On | Eastern North Carolina Now

    If you've ever made a bad deal you understand how people in the 51 North Carolina public power communities feel. In the 1970's, fuel prices were rising faster than August temperatures and OPEC was threatening to cut off fuel supplies. These communities joined together to purchase portions of new electric power generation facilities. What seemed a prudent business decision turned into a perfect storm these communities have been trying to unravel for years.

    No sooner was the agreement made to purchase capacity, mostly in nuclear plants, than the Three Mile Island nuclear incident occurred. The fallout drastically increased regulations, resulting in soaring nuclear plant construction costs. The investment by public power communities was exponentially higher than first anticipated. Further, new energy-saving electrical appliances reduced the demand for electricity and new cost efficiencies were developed to build generation plants for natural gas and other fuels. Another setback for the municipalities occurred when the federal government changed accounting procedures for selling surplus capacity back to the investor owned utilities.

    The cities didn't help themselves. In those early years they generated handsome profits from their power operations, frequently using those profits to fund the rising costs of municipal government; their ad valorem property tax rates were often below comparable communities without power operations. Additionally, the organization they formed to help with coordination and economic development, Electricities, was extravagantly mismanaged.

    By the turn of the 21st century the situation was ugly. Residents in these municipalities were hit by the double whammy of higher electric rates, as much as 35 percent greater than customers buying power from co-ops or investor owned utilities, and escalating ad valorem property tax rates needed to help pay debt service payments. These communities owed more than $5 billion dollars in 1999, considerably more than the assets they owned were worth.

    What to do? Lengthy discussions pondering how to best eliminate the debt without adversely harming the communities involved produced three solutions, none of them ideal. The first, a status quo approach, advocated that municipalities stay the course and ultimately pay off the debt. It was the least attractive because it negatively impacted a community's finances and potentially hurt economic development. The second option was a bailout. Electricities vigorously lobbied the legislature to get the state's taxpayers to pay down or pay off the debts. There was a suggestion that Duke or Progress Energy should absorb the debts, but shareholders of both balked at the bailout. So did legislators who questioned why all the state's residents – many of whom had not received any benefits in return – should bail out communities that made a bad deal.

    The third and most attractive solution was divestiture. In this plan, municipalities would sell their ownership stake back to Duke Energy. The deal now under consideration would have The Eastern Municipal Power Agency receive about $1.2 billion of the $1.7 billion they owe in outstanding debt. While not enough to get them out whole, this option would clean up balance sheets by eliminating debt, keeping communities in the power business, and ultimately providing a means to pay off the debt. It is the least harmful of alternatives.

    Sometimes the best course is to cut our losses and move on. That appears to be the case with the Municipal power communities and we hope the necessary approvals are received.

    Publisher's note: Tom Campbell is former assistant North Carolina State Treasurer and is creator/host of NC SPIN, a weekly statewide television discussion of NC issues airing Sundays at 11:00 am on WITN-TV. Contact Tom at NC Spin.