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Senate | March 18, 2015 | Committee Room | Commerce Committee Meeting

Full MP3 Audio File

Call the meeting of Commerce to order. First of all, a little house keeping. Sergeant of Arms, we have Marcus Kitt and Canton Lewis. Thank you for being here. We appreciate it. We’ve got two pages with us today and they are somewhere, aren’t they? There they are. We have Nicholas Otta from Wake Forest, Senator Barefoot and Jasmine McNeill from Raleigh, Senator Blue. Thank you for serving this week and I hope you’re having a good time. I am going to now open it up and we’ll hear Senate Bill 305. I’m going to ask Senators Newton and Bryant to come up here and give a brief explanation and then we will call on staff, Heather Fennell, to further dig into the bill and then we’ll open it up for questions and a vote. So, Senator Newton? [SPEAKER CHANGES] Thank you Mr. Chairman. Can you hear okay there ?? Can everybody here me okay? Thank you Mr. Chairman. Thank you for agreeing. Senator Gunn I want to thank you personally for agreeing to hear this bill today, and it’s a beautiful day and I know you’d rather be on a golf course, but I appreciate you making the exception for us today. I hope it works out better for you tomorrow. [LAUGHTER] [SPEAKER CHANGES] I’m just glad this is not tomorrow, or we would not be hearing it. [LAUGHTER] [SPEAKER CHANGES] That’s right. And fellow committee members, thank you for being here today and I really appreciate the opportunity to be here on this beautiful Spring day and if you’ll bear with me for a moment, there are times like today where you just sort of have to pinch yourself and say, “Am I really here doing this?” Senator Bryant and myself, Representative Collins who’s here, we’ve worked on this issue that’s before you for such a long time, and so many of you folks that are out in the public here have worked on this a long time and it’s sometimes hard to imagine that you really actually have gotten to this place where we have a chance to do such a great thing for our state and for Eastern North Carolina. We have an opportunity with this bill to address a very serious and long-standing problem in Eastern North Carolina. Many folks who don’t live there are not directly aware, but we’ve had now a couple of decades where Eastern North Carolina cities have been carrying a very heavy debt from their purchase of generating facilities here in North Carolina. They own part of Sharon Harris, two nuclear reactors, the Brunswick Reactors in Southport, and two coal fired plants in Roxborough Mayo Colfaire plants. And from that they took on billions of dollars of debt. And today they still have about 1.8 billion dollars of debt from that purchase. What that means is, for rate payers in towns like Wilson, Rocky Mount, where Senator Bryant’s from, Smithfield, Clayton, Greenville, Newburn, Kenston, there’s a list of these cities on the back of your summary if you have any interest in seeing that and seeing how much debt they’re carrying. What that means is, is that we pay an extra premium on our monthly electric bill, and it varies from town to town but it could be, I’ve heard it said as high as 50%. I’m comfortable with a lot of towns are paying at 35-40%, what I’ll call mark-up premium on their rates, simply to pay this debt. And we’ve been doing it for year after year after year. As you can imagine, this has a huge negative economic impact on our districts. It’s not just the common man, the working family that struggles to pay you know, 500 or maybe an 800 dollar in the winter electric bill. It’s our small businesses. It’s our churches. It’s our large businesses. It’s our major manufacturers. It’s a struggle to deal with this issue. And what we have before us is a historic opportunity to address this in a market-driven way. With years of work, the cities have negotiated in good faith over a long period of time, through electricities called ??. And they have reached an agreement with Duke Progress. It was First Progress Energy and then after the merger Duke Progress, to

Where Duke Progress would essentially buy out their partners. Duke Progress owns the rest of these facilities and they manage these facilities and so what they’re doing essentially is they’re buying out their partners and they’ve reached an agreement to buy these facilities for $1.2 billion and so what this piece of legislation does, and staff will explain it in more detail, is enable legislatively and legally for this deal to be completed. This is something that the cities in Eastern North Carolina desperately want but also importantly this is important for Duke Progress and its rate payers because it enables them to reduce their fuel cost long term and ultimately keep rates low in the Duke Progress area. It truly is a win win situation for the state of North Carolina. With that I thank you for letting me be here. I look forward to answering questions and I know Senator Bryant would like to make a few comments as well. [SPEAKER CHANGES] Thank you Senator Newton, members of the committee. It is really great to have an opportunity to solve a problem like the problem we are solving with this legislation. I represent four of the electric cities, Rocky Mount, Wilson, Scotland Neck and Hobgood so we have cities and small towns impacted by this and just think about the crippling pressure this debt has been for those in our region. This is an opportunity to take one of the structural steps we can take this session to address the disparities between the East and the rest of the state and to help us and our families and businesses have a chance for prosperity and growth that we wouldn’t otherwise have without this support and also it’s very important to note that if it weren’t for the Duke Progress merger this wouldn’t even be an opportunity on the table. So that gave us an opportunity to take this step that would benefit all of North Carolina. So we have I think 270,000 accounts in the Eastern Municipal Power Agency that as a result of this merger we won’t be bowed out and go into the sunset, we will become a significant wholesale power purchaser with Duke Progress Carolina, so we are also participating in the repayment of the debt as well as getting relief from our own debt in this process. In addition those of you who are not in the Duke Progress territory or the electric cities territory benefit in helping to make this structural step that will help economic opportunity across the state and the staff will review how each of the, how the Duke Progress customers will be impacted by this as well as our electric cities customers. I started out on this journey as a city council representative in Rocky Mount and served as an Eastern Municipal Power Agency Commissioner for three years as well. So this is a long time in the works and this is a historic day for us I think in the state and in the East to be able to address this kind of issue together and the bipartisan support we had yesterday, 40 some members across party and regional lines, standing together to say we want to take this step was really a moving experience and I want to thank you all for that. Thank you so much. [SPEAKER CHANGES] Thank you Senators. Senator Tillman. [SPEAKER CHANGES] Thank you, Mr. Chairman. Senator Bryant, I’m going to use your word, I’m particularly interested in this bill. I do have a question, Senator Newton, Senator Bryant, I think you all could, I’m pretty sure you know the answer to it. If after this deal is completed, and I’m all for it, there will be some debt leftover. We won’t totally wipe out their big, big debt. How much is leftover and are they going to be well-equipped then to handle that? Senator Newton? [SPEAKER CHANGES] Yeah, thank you, Senator Tillman and that’s a very good question. This deal will wipe out approximately 70% of the debt. In dollar numbers there’ll be approximately $600 million left for these 32 cities to repay and this bill specifically provides for the mechanism that they do that. This debt that we currently have is all bonded debt but it’s attached to these assets, these generating assets. With the sale of these assets there’s going to have to be new bonds to secure the, to pay the remaining debt and that’s what this bill does and when we get into staff’s answer we can drill into that. [SPEAKER CHANGES] One follow up. [SPEAKER CHANGES] Follow up then we’ll let staff speak too. [SPEAKER CHANGES] Now henceforth after the deal is done there won’t be a wiggle out room of not paying that debt. This is going to be bonded debt and they’re going to attach assets if not, so we’re pretty clear that they will take care of their obligations. [SPEAKER CHANGES] Absolutely Senator Tillman and that is, the cities are all

bound. Actually they're bound collectively. Should one city or municipality not, somehow have trouble making payments, they're all bound collectively on this debt. [SPEAKER CHANGES] We don't need to repossess any city halls down there? [SPEAKER CHANGES] Correct. [SPEAKER CHANGES] Thank you. At this time we will call on staff, Heather Fennel, to further explain the bill. Heather? [SPEAKER CHANGES] Thank you, sir. I'm gonna start with section 1 of the bill. Section 1 of the bill provides cost recovery for any public utility that purchases the assets of a joint municipal power agency. The first section provides that recovery of the purchase price of the assets will be allowed in an annual rider. What will be allowed will be the acquisition cost, which includes the actual cost paid for the assets, including any amount above net book value. Subsection B of this first section provides what is allowed to be recovered in the rider, and that will include the acquisition cost, any financing cost, any operating cost, and it also includes an adjustment to reflect the changes in the proportion between the wholesale and retail load in the state that will happen after the sale of the assets. Subsection B provides how the rider will be determined. Each year the electric public utility must file information to allow the commission to determine the amount of the rider. The acquisition costs will be levelized over the length of the rider. That means usually the acquisition costs would be greater in the early years and less over the time of the rider. This allows that these costs will be levelized over that period of time. Subsection C provides the information that a utility must provide to the commission in setting the rider each year, and subsection D provides that the rider will expire at the end of the useful life of the acquisition assets. As you can see in a summary in a footnote, it provides the useful life of each of the assets, and that ranges from basically 20 years to 31 years. So the rider will exist for approximately 31 years. So that's the cost recovery for the public utility that purchases these assets. The remainder of the bill, section 2 through section 8, provides changes to chapter 115 B of the general statutes. And that chapter provides the statutory framework for the cities to form joint agencies, also known as MPAs, to purchase the assets. So section 2 changes the purposes of that chapter just to reflect that the purpose of this chapter's also to allow the sale of the duration assets. Section 3 amends the duties of the joint agencies to allow that they can use their revenues from the sale of electric power to pay for the new bonds that will be issued. Section 4 gets into language that allows for support contracts. So support contracts gets to Senator Tillman's questions, and the the support contracts are actually the contracts that are gonna allow the bonds to be repaid. Each city will agree to make payments under the support contracts to pay a proportionate share of the bonds, also to finance any collateral posting requirements of any power purchase agreements, and also to finance any required reserves of this proposed sale of the assets. As Senator Newton noted, on page 7 lines 49-50, should any city default, the other cities in the deal agree to pay for that city's portion. The support contracts can last for a period of up to 30 years. And if you look on page 8 lines 9-11, the payments under the support contracts are considered an operating cost of the enterprise systems, and will be used to pay first the debt. The payments under this contract, just like any other contract of the joint municipal power agencies, can only be used, the revenues from the electric system must be used to pay for the support contract. There's also new language on page 8, lines 43-49 that reinforce that the oversight of the LGC is still in effect, and should anything happen, the LGC can take over financial oversight over these cities and make sure the debt is repaid. Section 5 is the bonding authority. This is the specific language that gives the specific authority for the new bonds. If you look on page 9, lines 35-37, page 9, lines 34-37, these are the new bonds that can be issued. The only bonds that can be issued are to one, pay the difference between the price paid for the assets and the amount remaining on the current debt, and two, for the purpose of financing any collateral posting requirements that may be required of the replacement power supply arrangement that will be necessary. Now that the municipal power agencies are selling their assets, they will now purchase additional power from Duke to serve their retail customers. Lines 37-43 of that same page provide the revenues that can be pledged to pay those bonds, and those include the revenues from the sale of the project, the revenues from the sale of their power and their retail systems, and also

The support contracts that I mentioned earlier and the amounts the cities pay to the municipal power agencies to pay back those bonds. Sections 6, 7 and 8 are very similar and they make conforming changes to other sections in Chapter 159 to just make it clear that they payments made on behalf of the cities to the power agencies can be used to pay these new bonds as well as the existing bonds that they already have. And finally the act becomes effective when it becomes law. I’m happy to answer any questions. [SPEAKER CHANGES] Thank you Heather. At this time, I am going to open it up for either staff or the esteemed Senators for any questions or comments. Senator McKissick. [SPEAKER CHANGES] Yes, I have several questions. Perhaps Heather, you can help me out with some of these, okay? It’s my understanding that under this particular bill, what we will observe is rate decreases for individuals, after several years. But initially what you’ll see is rate decreases for I guess commercial and industrial users but a small rider on residential costs for about 25 cents a month or a little less than that. That gets paid out over about a three to four year period. Is that correct, first? [SPEAKER CHANGES] Probably, I would say that is correct. When you’re, the conversation you’re having now is about the Duke Progress customers. That won’t apply to the NCEMPA customers. Now the NCEMPA customers, the customers of the cities in the NCEMPA area, should see an immediate decline in their rates, all of them across the board, at the beginning. The projected impact of this purchase by Duke does show that for the first several years there will be a small impact on retail customers and what I have seen is that’ll be less than a quarter a month, for the residential customers, and for commercial and industrials depending on the size of the customers, they may have a small impact as well. But when you get to the later years, 2020, year 5-6 and beyond, all customers should have a decrease if their projected savings from the fuel savings are correct. [SPEAKER CHANGES] Follow up, Mr. Chair. Thank you for sharing that information, because that clarifies it. So that’s really the Duke Progress people that will be paying that 22 cents a month. In terms of those in Electro Cities, those customers, what is the projected saving they will see, in terms of estimated projected decrease in the amount that they’re currently paying? [SPEAKER CHANGES] We have some representatives from Electro Cities. They may be able to give you percentages. However they can’t give at this point the exact details the way Duke can for the exact cost, because of the way the right structures are. Basically, the individual cities set their own rates, but that’s based on power they purchase from the power agency which is also purchased from Duke. And those rates have not been set yet because those rates of the new wholesale purchases from Duke will be set based on a formula that is common for other wholesale purchases. I believe the amount we’ve heard is somewhere between 10 and 15 percent reduction, is the expected reduction in the rates. I will say that although there is not a way for the cities to at this point say the exact amount of the decrease, there was legislation enacted approximately three years ago, and I believe Senator Newton was also, maybe Senator Bryant was also sponsors of that legislation. And for the cities, especially the NCEMPA cities, statutorily they can only use their funds derived from the electric system for certain things. And those things are paying for the cost of the system, a small rate of return, and making debt payments. So if they don’t take the savings from this deal and put it towards reducing rates, what will happen is just their enterprise fund will just get bigger and you will be able to see that. So they are effectively statutorily forced to lower their rates, because they have nothing else they can do with these revenues, other than lower the rates. [SPEAKER CHANGES] Follow up, Mr. Chair, if I could. And that leads me to two additional questions. It’s my understanding the cities continue to own the distribution systems for electricity and they would be responsible in the future for maintenance as well as for expansion. Now in the models that have been created and the projections that have been done, are there sufficient funds that will be reserved so that in the future they can picture what I would call are anticipated demands, you know in the future? Granted you know, they’re going to be buying the power wholesale from Duke Progress but the infrastructure that it’s distributed through is a different issue so I mean, do we, is that built into the model? Or is there somebody here from Electro Cities or Progress that could help me with that? [SPEAKER CHANGES] It wouldn’t be built into the Progress model because they wouldn’t deal with that. Electro cities may be able to address that. They will have to go through the LGC and have the LGC make a determination, a final determination that they are sufficiently economically suited to make this deal. So you know as far as that, that’s all I can say on that unless you want to ask [SPEAKER CHANGES] If I can, Senator McKissick

We’ve got Graham Edwards from the Electrocities of North Carolina here. Mr. Graham, if you’d come to the mic, introduce yourself and see if you can help us here. [SPEAKER CHANGES] Thank you, Mr. Chair. [SPEAKER CHANGES] Sure, Mr. Chairman. Thank you very much. I’m Graham Edwards. I’m the CEO at Electrocities and the Eastern Power Agency. To answer your question directly this transaction only impacts the generating assets. The distribution assets, the customer service that the cities provide to their consumers right now, all that stays intact. Their infrastructure stays there. They will continue to improve the infrastructure as they go forward but they will do that anyway whether this transaction goes through or not, so from my perspective we’re dealing with just the generating assets and not the distribution or the customer service or what the cities are providing on their side of the service. [SPEAKER CHANGES] Quick follow up if I could? [SPEAKER CHANGES] Yes, sir. Oh, Senator Newton. [SPEAKER CHANGES] If I could add something to that. [SPEAKER CHANGES] Sure. [SPEAKER CHANGES] Keep in mind that all of the cities, that they’re operating and they’re led by their city councils who are of course elected by the voters, so I mean, I know there’s one mayor of one of the towns here and they hear from these rate payers regularly about not just their bill but the quality of their service. So they’ve been operating in that way for I don’t know how many decades. This has been going on many decades that they’ve been operating that way and they’ll have to continue to operate the same as they always have with these, the distribution. [SPEAKER CHANGES] Got the. [SPEAKER CHANGES] Follow up? [SPEAKER CHANGES] Follow up there for the gentleman at the podium. So what you’re saying is that this bill only deals with generating capacity. It would not deal with any of the infrastructure and distribution systems that you are responsible for continuing to maintain. Do you feel as if you have adequate reserves and resources for those expansions based upon the model we are working under right now cause obviously it looks like there are going to be rate decreases. I heard that the projected rate decrease was 10-15%. Is that accurate and if that is passed onto customers do you continue to have funds available for future expansion to guarantee that the needs and demands are met? [SPEAKER CHANGES] Yes, sir, the short answer is yes and let me expand a little if I may. The individual members, the 32 towns and cities and communities, they currently as Senator Newton said they design their own rates. The way they design those rates is they take the whole fuel power cost from the Eastern Power Agency and then they add their distribution cost to it, so they will continue to do that, it’s just that the wholesale power cost that they’ll be receiving from us will be significantly lower than it is today. Going back to your other question, each community is different. We have had communities that have grown over the last 15 to 20 years. We have had communities that have lost customers, lost load over the last 15 to 20 years. The customer mix matters, how much industrial customers they have. They have customers that use energy around the clock, so all those come in to say that I can’t give you a specific right now on each community, but what we can say is that we feel like that the book ends if you will is that the communities that have grown faster such as those around the Raleigh area primarily whether it be Apex or some of those, the will see in the 5 or slightly less than 5% impact whereas some of the other ones that Senator Newton and Senator Bryant mentioned, they can be upwards of 20% reduction. So, and they’ll be some all in between there, but it’s gonna depend on the individual community and how their current system is constructed. [SPEAKER CHANGES] Yes, Senator Bryant. [SPEAKER CHANGES] I wanted to also add to Senator McKissick that Electrocities is a full service entity for the cities and there are, there’s a rate committee. They’ve already been studying this. They look at the rates collectively but also they get support around looking at their differential impacts because many of these cities have different capacities. To address these details and for every locality there are some different impacts. Some groupings have more in common than others. They’ve been studying those, that, for over a year I’m sure and continue now that this is more eminent to look at it and the biggest thing in this bill is the requirement, the LGC review and the fact that they are required to maintain a revenue structure that will allow for the repayment of this debt which will include operating their facilities because that’s how they will repay debt if you follow my point. [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] So I think in terms of this bill we’ve provided a stronger safety net than would otherwise have been there. [SPEAKER CHANGES] And I’d like to thank both Senator Newton and Senator Bryant for bringing the bill forward and certainly for the foresight and studying of the issues that

...gone into it and I think what the information has been ?? by the gentleman from ElectriCities and from Heather on our staff. It certainly appears that all the intricacies have been fully evaluated, so I thank you for your joint and cooperative leadership on this. [SPEAKER CHANGES] Any other-- Senator Tillman. [SPEAKER CHANGES] Chairman, I know there's probably others that want to say something and are just dying to say something and it's okay with me, but I want to move a favorable report. I don't know anybody I've talked to that doesn't like this bill. [SPEAKER CHANGES] Hold that. Thank you, sir. Anybody else, my distinguished colleagues, that would like to speak or have a question or comment? Senator McInnis. [SPEAKER CHANGES] Just want to say that I have one city that's involved -- the city of Laurinburg, North Carolina -- and they are very, very excited to see this legislation coming forward and hope that it moves forward quickly so they can give some relief to their folks that they're selling power to. So, they're very, very appreciative for this legislation. [SPEAKER CHANGES] Thank you. Senator Smith? [SPEAKER CHANGES] I just wanted to make a point that from an economic development standpoint this is wonderful for eastern North Carolina because it has been really a problem recruiting companies when they're looking at such a high utility rate that other places don't have. So, this will make a big difference in economic development recruitment. [SPEAKER CHANGES] See no others. I would like to ask Mr. Edwards, do you need any additional comments? I know that you traveled far to be here. [SPEAKER CHANGES] Mr. Chair, thank you. I'll do just a comment, if I may. Just very short. Members of the committee, thank you all very much for allowing us to be here, but also thank you for your consideration. Senators that sponsored and co-sponsored the legislation that was introduced yesterday both in the Senate and the House were excited about it. I know I've personally been with ElectriCities for almost six years now and this is something we've been working on ever since I got there. I know that Senators Newton and Bryant, they have been thinking about this for many, many years as well as others have. So, I just wanted to say thank you very much. Thank you for the introduction of the bill. I also want to say thank you to Duke Progress, because the Duke Progress people have really come to the table with us. It was a tough negotiation and I think we settled on where both parties are satisfied. Neither party got what they wanted completely, but, also, we got enough to where the deal makes sense for everybody, not just for Duke Progress but for our customers and our members, but also for the state of North Carolina. Let's pitch from an economic development perspective. Thank you very much and we hope to see this bill go through pretty quickly. [SPEAKER CHANGES] Thank you, Mr. Edwards. Does anybody--? Yes, Senator Bryant. [SPEAKER CHANGES] We just want to recognize that Mayor Bruce Rose is here from Wilson, North Carolina and we just want to recognize him in support of it. Thank you. [SPEAKER CHANGES] Very good. Is anybody else in the audience who is just itching and burning to speak? [SPEAKER CHANGES] See none. Senator Tillman has moved for a favorable report with a serial referral to finance. All in favor say aye. [SPEAKER CHANGES] Aye. [SPEAKER CHANGES] Opposed no. Ayes have it. There will be no other business. We are adjourned.