Sometimes the best option is to cut your losses and move on
Published August 1, 2014
By Tom Campbell
by Tom Campbell, Executive Producer and Moderator, NC SPIN, July 31, 2014.
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 July 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 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 occured 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, would keep communities in the power business, and would ultimately 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.
August 1, 2014 at 10:11 am
Norm Kelly says:
'the organization they formed to help with coordination and economic development, Electricities, was extravagantly mismanaged'. Let's see. A government agency that was extravagantly mismanaged. Have we heard of this before? Has there ever been a government agency that has been mismanaged? If we all put our heads together and think long & hard, possibly do some web research, I'm sure we could find other examples. Except chances are that what we would find is government agencies that are NOT monumentally mismanaged anywhere in the country can be counted on 1 hand. The problem that conservatives, Libertarians, and TEA people have with government at any level is that it is virtually NEVER properly managed. Take a look at some local ventures to find the facts.
In NC the state OWNS & operates the ABC stores. How well managed is this and what have the people in control done? First, it is HORRIBLY mismanaged! This is such an understatement that words do NOT exist in the English language to properly describe how monumentally the ABC system has failed in our great state. The excuses for why the system continues are so ridiculous as to be completely unbelievable or supported by logic and thinking. The response from the controlling authority? DO NOTHING. Make some minor changes around the perimeter, but leave the organization in place. TaDa! Problem solved. No. Not solved at all, just not on the top half of the local newspaper or a story on the evening news, so people forget about it.
Socialism DOES NOT WORK! Ever. At all. No matter who is left in charge, whether it the socialists who believe in socialism or the conservatives who despise socialism. It always fails! Even the VA health system is a monumental failure, regardless of how often or how much the Socialist Party of the US, formerly known as the Demoncrat party, tries to tell us different. Electicities was doomed to failure from the beginning because the people who were responsible for managing it are not only government types, but not business managers, and responsible for things like property taxes and government budgets at the same time. It's too easy for government types to use money intended for one expense to be 'realigned' and used for another expense. Witness Gov Mike stealing money from the E911 fund to pay for general fund expenses so the state wouldn't show a deficit. Witness Gov Mike stealing sales tax money from the local communities to pay for general fund expenses so the state wouldn't show a deficit. Is anyone surprised that Electricities was monumentally mismanaged? No one should have been. Especially the socialists who support government intervention in the free market at every opportunity. And then screw up that market immediately.
Of course, on of the possible solutions was to stick the rest of us with the cost of the decision and mismanagement by this group of communities. The governments answer to making monumental mistakes is to stick the tax payers with the bill. Just like setting homeowners insurance rates for me as if I actually lived on the coast, in hurricane territory. Legislators claim that it would adversely affect beach property and beach communities if insurance companies were allowed to charge risky areas for being in risky areas. So I am punished in my premiums to make sure the people who live in risky areas aren't punished for living in risky areas. Spread the expense amongst everyone so no one is hammered too hard. Except, like all socialist schemes, I am charged for an expense that I get ZERO benefit from. Cuz it's fair to one group, I'm supposed to accept that it's NOT FAIR to me. Cuz some government agency said so.
I hope the deal is approved as well. The local communities, those that chose socialism years ago, should be the ones forced to pay the remaining debt balance. They should be the ones who's property taxes, local fees & taxes, should go UP to pay off the remaining 200million dollars! Did I do the math right? If not, it does NOT really matter. Whatever the leftover balance of the debt is, it should/must be paid by the communities that made the deal with the devil to start with. No one outside the local communities should be forced to pay a single penny of the remaining debt. It was their plan, let them accept the benefit OR the loss. What's the difference, in general, between the free-market and socialism (big government!)? In the free market, those who participate either make a profit or take a loss. In the lala land of socialism, everyone who wasn't even involved gets stuck with the bill also. The socialist scheme usually results in a loss, it's just that pols have such a slick way of burying their loss in the general fund, the loss is spread among so many people, that the hit to each tax payer is relatively small and therefore not noticed by enough people. Except when enough socialist schemes fail and the expenses start to mount, then people start to notice it in their tax bill.
The Town of Cary is headed down the socialist road. We have purchased land in downtown and sold it at a loss. Then we guaranteed a loan for a bed and breakfast at such a high cost that it's almost a guarantee that we'll get stuck with the bill. How many rooms does the b&b have to rent in order to pay off an 11 million dollar loan? And then it didn't even take into account the expense of the Town to upgrade the water & sewer lines in the area. Then we're goind to use some of the expensively acquired land to build a park. Which will attract people downtown to spend our money. A park!?! Then the Town added to the socialist plan by refurbishing, virtually rebuilding an old theater to create a reason for people to go downtown. A socialist scheme to compete with private businesses. There was a theater in town that showed some of the same type of movies that The Cary does, and it went belly-up. What's the diff? The private theater went belly up because it could not afford to pay it's bills. The Town has general tax revenue that it can use to bolster The Cary, and all the other downtown ventures, so that belly-up is not an option. Yeah, socialism!! Aren't we the generous people. Governments DO NOT learn from past failures. Non-managers do NOT understand how to manage a private business, and the fact is that it's not a private business so there's no reason to use business managers to actually manage the venture. Failure built in from the beginning. Just like ALL of socialism! Yeah! I really don't pay enough in property taxes, so I'm looking forward to the future!
