Smithfield residents will soon pay less for electricity, while their neighbors in Selma will likely see their light bills increase after falling briefly.
On Monday, the two towns’ councils learned the results of independent studies of their electricity rates by Utility Financial Solutions LLC, a Michigan firm. Smithfield and Selma are two of 32 members of N.C. Eastern Municipal Power Agency, which recently agreed to sell their power-plant assets to Duke Energy in return for lower wholesale electricity costs.
At the recommendation of ElectriCities, which oversees the power agency and advises its members, the towns each paid more than $20,000 to have UFS develop a plan to pass savings onto their customers in a responsible manner. As the deal with Duke closed Aug. 1, the towns expected to see their wholesale rates fall by up to 15 percent.
But rather than wait for the results, the town councils in Smithfield and Selma each went ahead and passed arbitrary across-the-board rate cuts. Smithfield approved a 5-percent cut starting in August, and Selma followed suit by voting 3-2 to slash its rates by 10 percent starting Aug. 30.
Smithfield will cut rates soon
In Smithfield, UFS Vice President Dawn Lund said Monday that the town could afford to drop its rates another 5 percent this year. Based on current spending levels, that would give the electric department enough money to cover its operating expenses, debt payments, depreciation of equipment and to keep up with inflation. It also maintains a healthy debt-coverage ratio, she said, which is required to avoid defaulting on outstanding bonds and facing higher borrowing costs in the future.
But by taking a big cut now, Lund said, Smithfield’s leaders will need to hike rates starting with the fiscal year that begins in July 2018. At that time, Lund strongly recommended the Town Council start passing small annual rate increases – around 2-3 percent each year – to keep up with inflation.
It would require a change of mindset on the part of politicians, she said, but it’s the most responsible way to run a public power utility. Most customers wouldn’t notice such small hikes, Lund said. In fact, a particularly cold winter or hot summer could easily raise bills by more than 3 percent, she said.
“Boards and councils get scared of a rate increase, when really you’re not even affecting your customers as much as weather is affecting them, and you’re keeping the system healthy,” she said. “What happens over time is, you avoid those double-digit (percentage) rate increases, and so it’s not a large impact on your customers.”
If the council doesn’t have the political backbone to commit to ratcheting up rates starting in 2018, Lund said it would be best for Smithfield to maintain the current levels – which just dropped 5 percent in August. That would give the electric department enough money to operate at healthy levels through June 2021, she said.
The worst thing Smithfield could do, Lund said, is to approve the 5 percent cut and then leave the rates low for years to come. That would drain the system of cash, she said, and the town would face large one-time increases in the future.
In the end, the council decided to make the 5-percent cut, and no one expressed much interest in hiking rates any time soon.
“That totally makes sense from a business standpoint,” Councilman Andy Moore said of the inflationary rate hikes. “But from a political standpoint, it’s probably not the best thing to do.”
Following that direction from the council, Lund will take a week or two to redesign the town’s electricity rates to incorporate the cut.
Lund will also work to make the rate structure more fair to the various classes of users. For instance, Smithfield currently charges some customers more than it costs to provide them service, including residential customers and smaller businesses. That means they are subsidizing the bills of other groups, including residential time-of-use and large industrial consumers.
Because of that restructuring, some groups will get more than the total 5 percent decrease the council approved, Lund said, while others will get less. For example, residential customers will likely see an even greater rate reduction. Lund said she will design the rate structure to gradually even out over the next three to five years.
The Smithfield council indicated that it might move to drop rates as soon as October.
Selma faces rate hike
Lund gave a similar presentation to the Selma Town Council, except she recommended a rate hike instead of a cut.
Selma’s wholesale power cost fell more than expected, by 18 percent, Lund said. However, the electrical department has been underfunded for years, she said, so she would not have recommended any rate cuts. Instead, the savings would have presented a good opportunity for the electrical department to turn its finances around and get to a healthy position.
“You were operating at a loss, and the decrease in (wholesale power cost) just kind of caught you up,” she said.
While she would not have recommended a rate cut, Lund said Selma could have maintained its old rates for the next four to five years. At that point, she would have advocated for the same policy of small annual hikes that she suggested to Smithfield. If the council felt intense political pressure to cut rates, she said, Selma could have managed a 2-3 percent this year, followed by small hikes starting in a year or two.
But the council did approve a 10-percent rate cut in August, and the town must now find a way to stem the bleeding.
If the Town Council waits until the start of the next fiscal year to raise rates, Lund said, Selma would need to increase them by 7 percent. After that, she said Selma should raise rates 2-3 percent each year to stay on track.
Mayor Cheryl Oliver, who voted against August’s blind rate cut, said she would like to take action sooner than later. Lund said Selma could potentially stagger the increase by raising rates 3.5 percent in January and another 3.5 percent in July. Oliver said she would like to look into that possibility.
“I would like to see what a mid-year adjustment could do, just so we don’t continue month after month to dig ourselves in a deeper hole,” she said.
The Selma council scheduled a special meeting for 6 p.m. Oct. 5 to explore its options to get the electric department’s revenues back in the black. Lund or one of her associates will take part in that meeting remotely over the Internet.
Councilman William Overby, who has challenged Oliver’s bid for reelection in November’s mayoral race, strongly supported the arbitrary 10 percent rate cut. The motion to do so came from Councilman Tommy Holmes, whose seat is also up for reelection.
In hindsight, Overby said after the meeting, it may have benefited Selma to wait until they had more information.
“It probably would have been better,” he said. “But it seemed like it was taking forever to get to this.”