A costly legacy for power rates

Jun. 16, 2013 @ 03:00 PM

City of High Point customers who agonize over paying higher electric rates can blame the situation, in part, on an incident 34 years ago in a city 400 miles from here.
On March 28, 1979, the nation’s worst nuclear power accident unfurled at the Three Mile Island plant near Harrisburg, Pa. In the wake of the calamity, the cost to build nuclear plants skyrocketed as jittery regulators placed new rules on constructing facilities.
The exponentially greater costs directly affected the arc of construction on the Catawba Nuclear Station and other facilities serving North Carolina, whose investors included municipal power providers such as the city of High Point. The city is among 51 municipalities under the banner of ElectriCities of North Carolina Inc., which represents cities and towns that provide their own power to customers.
High Point continues today to pay the heavy debt from the nuclear power plants developed more than 30 years ago. City staff and elected leaders are considering an upcoming fiscal year budget that includes a 4.9 percent electric rate hike. The 2013-14 budget will take effect at the start of the new fiscal year July 1. City leaders have imposed a series of electric rate hikes dating back years as High Point manages its own power grid.
The city’s share of the debt for its municipal power agency was $271.7 million as of the first of this year, said City Manager Strib Boynton. By contrast, the city’s proposed overall budget for the upcoming 2013-14 fiscal year is $343.7 million.
The city of High Point is one of the five largest cities in N.C. Municipal Power Agency No. 1, which is part of ElectriCities. Municipal Power Agency No. 1’s debt, as of Jan. 2, was $1.4 billion, Boynton told The High Point Enterprise.
The debt reflects the unwelcome legacy of Three Mile Island.
“A big part of what they ran into was the carrying costs,” said Jim Warren, executive director of Durham-based NC WARN, an energy industry watchdog group. “When you are dealing with that much money with those expensive projects, the finance costs become so large along the way. So when you have setbacks and delays, it just kills them financially. The financing costs, in some instances, ended up being half or more of the total price of the project.”

The nuclear financial fallout

One fiscal irony of the fallout on High Point and other municipal power providers from Three Mile Island is that the cities and towns pressed to get involved with nuclear power during its heyday in the 1970s.
When the decade began, nuclear power was seen as a cheaper, more efficient energy source for the future compared to coal or petroleum. Duke Energy Corp. and Carolina Power & Light Co., which later became Progress Energy, pushed ahead with plans to build a series of nuclear plants.
Leaders of the municipal power cities and towns joined the campaign. They pressed the N.C. General Assembly in the mid-1970s to pass legislation allowing the municipal power providers to join with corporate utilities in developing nuclear energy. The thinking at the time was that the municipal power cities and towns would be able to provide cheaper electricity to customers, lowering the electric rates households and businesses had to pay.
Legislation allowing cities and towns to take part in owning power generation passed the General Assembly in 1975. The city of High Point, through Municipal Power Agency No. 1, purchased ownership in the Catawba nuclear plant in 1978.
One year later, the trajectory of the nuclear power industry shifted during the last week of March 1979 when the magnitude of the Three Mile Island accident began to unfold. In the months that followed, regulators began to impose stricter controls on the construction of nuclear power plants, including ones in progress or on the drawing board in North Carolina.
Construction costs escalated dramatically and quickly, raising the debt load for both corporate utilities and municipal power cities and towns. The municipal power providers took what they thought was a relatively low-risk venture into nuclear power, but the dice came up snake eyes in a monumental way.

The lingering price to pay

In the wake of Three Mile Island, the cost to build the Catawba nuclear plant increased from an initial projection of $1.375 billion to an actual cost of $2.507 billion, according to ElectriCities.
“These costs do not include the cost of initial fueling, working capital and special funds deposits, or interest during construction, which are all significant to each individual owner,” ElectriCities reports.
The power agency, along with the city of High Point, “is legally bound to repay the bonds; (there are) no cancellation opportunities,” according to ElectriCities.
As of now, the Catawba nuclear plant power debt isn’t expected to be fully paid and retired until the year 2043, according to a projection by ElectriCities.

What is to be done?

The municipal power providers are trying to take steps to minimize the impact on customers from the debt repayment. For example, ElectriCities has restructured debt to take advantage of the current low interest rates and monitors other costs for savings that can be applied to debt payment. Municipal Power Agency No. 1 has cut its debt by $1.3 billion since the high mark for the debt level in 1993, according to ElectriCities.
Warren said the example of Three Mile Island serves as a cautionary tale today as the debate continues to swirl about nuclear power.
“In fairness, it’s really complicated technology,” he said.
The fact that municipal power cities and towns such as High Point contend with the financial fallout of Three Mile Island more than 30 years later “speaks to the multiple layers of problems with such projects” when something goes awry, Warren said.

pjohnson@hpe.com | 888-3528

 

It was supposed to be the proverbial win-win deal — corporate utilities and cities and towns providing power in North Carolina would go in together to build nuclear power plants and supply cheaper energy to their customers.
More than 35 years ago, utility industry officials and politicians came together to craft a deal to allow private utilities and municipal government power agencies, including the one representing High Point, to co-own nuclear power plants. The plan passed the N.C. General Assembly, then came before the voters of the state as a change to the N.C. Constitution.
Voters approved the plan in 1977. A year later, the corporate utilities, cities and towns went in on a deal to build the Catawba Nuclear Station.
But the win-win proposition began to erode in the last week of March 1979 when an accident at the Three Mile Island nuclear plant in Pennsylvania riveted the nation and shifted the direction of the nuclear industry. Requirements for building nuclear plants became more stringent, time frames for building facilities lengthened by years and the bottom-line costs skyrocketed.
Veteran High Point City Council member Becky Smothers, who serves today and also did in the 1970s, acknowledges the pivotal role Three Mile Island played in pushing up the cost structure of the Catawba nuclear plant.
The hope was that the collaboration between the corporate utilities, such as Duke Energy Corp., and the municipal power providers would lead to lower rates and a stable, long-term supply of power, said Smothers, a former mayor who first joined the City Council in 1977.
But after Three Mile Island, the cost of building the Catawba nuclear plant increased exponentially.
“What had been projected as the build cost of $823 million jumped to $1.3 billion in just design changes,” Smothers told The High Point Enterprise.
Eventually, the Catawba Nuclear Station ended up costing $2.507 billion, according to municipal power trade group ElectriCities of North Carolina Inc.
Duke Energy and Carolina Power & Light Co., which became Progress Energy, were trying to build a series of nuclear plants to serve North Carolina when Three Mile Island happened, said Jim Warren, executive director of Durham-based NC WARN, an energy industry watchdog group.
“They cancelled, between the two of them, nine or 10 reactors,” Warren said.
The nuclear plants that were cancelled included three set for Davie County in the Piedmont, he said.
At the Shearon Harris Nuclear Generating Station southwest of Raleigh, the overruns ended up pushing the final cost far beyond the original price tag for the project, Warren said. 
“They started off trying to build four reactors for $1.3 billion. They wound up building one that cost over $3 billion,” Warren said.

pjohnson@hpe.com | 888-3528