Legislation would limit municipal electricity revenue transfers

The legislature’s Municipal Power Agency Relief Committee met today and approved new legislation that would put limits on how much cities and towns can tap funds from their municipal power agencies.
The legislation would put in place guidelines from the Local Government Commission and mirror legislation passed last year but was limited to a handful of towns. Here’s the bill text.

AN ACT providing that the Towns of Clayton, Selma, and Smithfield shall use revenue derived from rates for electric service for paying the direct and indirect costs of OPERATING the ELECTRIC system, TRANSFERRING amounts that REPRESENT a rate of return on the investment in the electric system, and making DEBT service payments.

The General Assembly of North Carolina enacts:

SECTION 1. Article 2 of Chapter 159B of the General Statutes is amended by adding a new section to read as follows:

“§ 159B‑39. Permitted uses of revenue from electric power rates.

(a) A municipality as authorized in this Chapter shall use revenue derived from rates for electric service to (i) pay the direct and indirect costs of operating the electric system and (ii) transfer to other funds of the municipality a sum that reflects a rate of return on the investment in the electric system to the extent allowed in subsection (c) of this section. Any remaining revenue shall be used to produce lower rates on electric service within the area served by the municipal electric system and to make additional debt service payments on bonds or other indebtedness incurred by the municipality to finance improvements to the electric system. A municipality shall not otherwise transfer revenue from an electric utility fund to any other fund of the municipality for any other purpose not explicitly authorized by law.

(b) The direct and indirect costs of operating the electric system include all of the following:

(1) Debt service payments on indebtedness incurred for the electric system or secured by revenues of the electric system.

(2) Capital improvements or equipment for the electric system.

(3) Payments for the cost of power purchased under contractual arrangements.

(4) Debt service, maintenance, renewal, and replacement or other reserves required by legal documents entered into by the municipality in connection with the issuance of bonds or other indebtedness for the electric system.

(5) Reserves deemed necessary by the governing body of the municipality to assure that funds are available to maintain the financial and operational integrity of the electric system.

(6) Maintaining a rate stabilization fund to minimize the impact of periodic rate changes that would otherwise be required to reflect changes in costs of operations and demand for electric service.

(7) Making payments in lieu of taxes to other governmental units to reflect property taxes that would have been collected by the other governmental unit if the municipality were not the owner of the electric system.

(8) Making transfers to the general fund or other funds of the municipality to reimburse the general fund or other funds for costs paid from the fund that are reasonably allocable to the electric system.

(c) The total amount transferred to other funds of the municipality authorized as a rate of return on the investment of the municipality in the electric system shall not exceed the amount allowed in this subsection. The amount to be transferred shall be calculated using amounts reported in the municipality’s audited financial statements for the preceding fiscal year. The amount transferred shall not exceed either of the following:

(1) Three percent (3%) of the gross capital assets of the electric system at the end of the preceding fiscal year.

(2) Five percent (5%) of the gross annual revenues of the electric system for the preceding fiscal year.

(d) The restrictions in this section shall not apply to any action required to be taken for a municipality by the Local Government Commission in accordance with G.S. 159‑181(c).”

SECTION 2. This act only applies to the towns of Clayton, Selma, and Smithfield.

SECTION 3. This act becomes effective July 1, 2011.

In the General Assembly read three times and ratified this the 15th day of June, 2011.

The problem has been the lack of oversight over how the towns use the money. Some places use the electricity revenues to fill budget gaps, buy firetrucks and do a lot of things that have nothing to do with the distribution of power. Here’s an excerpt from a recent Exile on Jones Street article on the subject that ran in the Indy in February.

What’s made matters worse, Gilbert said, is that some towns transfer funds from their electricity operations to shore up their budgets, preferring higher utility rates over higher property taxes.

The transfers, he said, amount to a regressive, back-door tax on ratepayers. “Lower income people spend a greater percent of their money on basic necessities. [The transfers] are effectively a tax that hits the poorer parts of our society the hardest.”

It’s a system that doesn’t seem to likely to change soon.

“Cities have gotten used to the transfer money,” Gilbert said. “Many of them have been doing it for a long time. Over the past few years, with city budgets taking a huge hit, they’re more dependent on them.”

Charting the power rates

Following on the story on electricity rates . . .

Here are four charts from a presentation by the Kenan Institute of Private Enterprise that illustrate the differences in electric rates in eastern North Carolina and the income levels in the areas served by the municipal electric companies. Click to enlarge.

Commercial Electricity Prices

Residential Electricity Prices

Residential Electricity Prices and Median Household Income

Residential Electricity Prices Per Capita Income

The cost of electricity is devastating Eastern North Carolina

Here’s the link to the latest Exile on Jones Street column in the Independent Weekly.

Last month, when the NAACP’s Truth and Hope Tour of Poverty in NC embarked on its two-day tour of high-poverty counties in the northeastern part of the state, those of us on board the bus knew we’d hear the stories of people who have lived in poverty for generations.

But what we didn’t expect was an education on how North Carolina’s bizarre municipal electricity system has devastated low-income people, tapped the savings of those on the margins and strained an already frayed social safety net to the point of breaking.

I consider what’s happening to be a massive public policy failure. Certainly the size of the bills are stunning and most of the comments on the article so far have focused on that, but when you think about how this affecting the region’s long term viability – from making it hard for residential customers to acting as an impediment to economic development, it’s hard to believe how you could have designed a worse system.
To me, the most important missing piece is the lack of oversight. In my experience, when you don’t have oversight, people cut corners, bend rules and game the system.
Maybe someone should do something about this.