EDITORIAL : Are Forest City electrical rates too high?

Many Forest City residents went into shock over their suddenly extremely high bills. Some on fixed incomes have made payment plans or taken money for essential needs to pay the power bill. Others called to ask how much money or reserve was used outside of supplying power needs. Many people called RCcatalyst to look into these matters.

We sent the following question to the mayor and council members.

5. Citizens have expressed their complaints about the unusually high electric bills. How can you justify an approximate $9 million electrical fund balance from your enterprise fund transfer to parks and recreation? Are the FC electrical rates too high?

Forest City Town Manager John Condrey was kind enough to provide some information on the enterprise fund that town has to provide electrical service.

As you are aware, our area had an unusually long period of cold weather with temperatures not rising above freezing for  an unseasonable number of days.  The Town electric rates did not change during that period of time; however, customers electric usage spiked considerably during this cold snap.  The town’s main sources of revenue are property taxes, sales tax, water and wastewater charges and electric sales.  Our property tax rate of 29 cents is very low for this area particularly  when compared to other towns that offer the broad array of services provided by  Forest City.  Our water rates rank 34th lowest of 437 water providers in the state.  Our wastewater rates rank 19th lowest out of 355  providers.  Our electric rates rank 25th out of 67 power agencies in North Carolina.  When you take into account the total mix of services the Town provides, we work hard to be affordable to our customers and citizens.  In order to keep the mix of the Town’s revenue sources reasonable, there are some transfers among the various funds.

The electric fund cash balance as of June 30, 2017 was $7,210,893.  It is important to keep in mind that in order to run an electrical system the Town has to be prepared to maintain and repair the infrastructure of this system that runs throughout the Town.  This includes two substations and 5,500 electrical utility poles and all the trucks, equipment and staff.  For instance, last summer the Town experienced some electrical issues that resulted in some significant power outages over the course of one weekend.  As a result of that event, the Town is in the process of spending over $600,000 for substation upgrades.  As in any business, you have to have cash reserves in order to meet emergencies that could potentially run in the millions of dollars.

While the Florence Mill Park as been on the design board for about a decade, we feel residents should know how their excess electrical funds are being spent. If year after year the excess collections are transferred, does this mean that FC Power customers are paying too much?

Further we looked to the NC School of Government for an opinion of transferring enterprise funds to the general fund balance. This link explains the following:

Legal Authority to Make Transfers From an Enterprise Fund

Do local governments have legal authority to transfer (appropriate or loan) money from an enterprise fund to another fund in order to pay for an expenditure that is unrelated to the enterprise activity? The answer to this question is generally yes, but there are some significant limitations.

State law confers broad authority on local governments to set fees and penalties (collectively, “rates”) for most public enterprise activities. With the exception of solid waste and stormwater enterprises, local governing boards have a lot of leeway in setting schedules of rates. A unit may vary its rates according to different “classes of service,” and it may charge different rates for services provided outside its territorial jurisdiction. And, although not explicitly addressed in the statutes, it appears that for most enterprise activities a governing board may set rates such that the revenue generated exceeds the costs of providing the particular service. In General Textile Printing and Processing Corp. v. City of Rocky Mount, 908 F. Supp. 1295 (E.D.N.C. 1995), a federal district court held that the city’s practice of overcharging customers for water, sewer, electric, and natural gas enterprise services, and using the excessive revenues to fund general fund activities, did not violate state or federal equal protection or due process provisions.

Furthermore, G.S. 159-13(b)(14) appears to at least indirectly acknowledge that a local government may generate profits from its enterprise systems. It states that

[n]o appropriation may be made from a utility or public service enterprise fund to any other fund than the appropriate debt service fund unless the total of all other appropriations in the fund equal or exceed the amount that will be required during the fiscal year, as shown by the budget ordinance, to meeting operating expenses, capital outlay, and debt service on outstanding utility or enterprise bonds or notes.

Although structured as a prohibition, this provision actually authorizes a local unit to transfer monies from an enterprise fund to another fund, as long as all of the budgeted expenses (capital, operating, debt service, etc.) for the enterprise activity are covered for the fiscal year. It thus provides a mechanism for a local government to use the extra revenue generated from an enterprise activity for other purposes.

There are some limits to the authority to transfer money from an enterprise fund, though. As explained in a previous post, the authority to transfer must be read in conjunction with the authority to set rates for the particular enterprise service. There are a few enterprise activities for which a governing board’s ratemaking authority is much more constrained. And those constraints affect the unit’s ability to appropriate or loan money from an enterprise fund. For example, solid waste fees must only be used to fund solid waste activities. See G.S. 160A-314.1G.S. 160A-317(municipalities); G.S. 153A-292 (counties). In Manning v. County of Halifax, 166 N.C. App. 279 (2004), the North Carolina Court of Appeals held that the county’s practice of setting solid waste availability fees such that the aggregate revenue generated exceeded the aggregate costs of operating the county’s disposal facilities was unlawful. And the reason the court knew that the fee revenue exceeded the costs of the solid waste program was that the county had transferred the “profit” from the solid waste fund to the general fund and used the money to support general government activities.

In determining whether or not a transfer from an enterprise fund is lawful a unit must first examine any earmarks on the money being transferred. If the money itself may only be spent to support the enterprise activity, it may not be appropriated or loaned to another fund to pay for an unrelated expenditure. Thus solid waste fee revenue may be transferred to the general fund or a debt service fund to make debt service payments on a borrowing incurred for a solid waste project. It may be moved to the general fund to cover legitimate reimbursements for services provided to the solid waste enterprise but financed in the general fund. The revenue, however, may not be appropriated to the transportation fund to purchase a new bus. It may not be appropriated to the general fund to pay for parks improvements. And it may not be loaned to the general fund to help balance the budget this year.

In addition to the statutory earmark on solid waste fees, state law requires stormwater fee revenue to be used only for to support stormwater management. See G.S. 160A-314(a1)(2)(municipalities); G.S. 153A-277(a1)(2) (counties). And transfers from electric funds of certain electri-cities may not exceed the greater of (1) three percent of the gross capital assets of the electric system, or (2) five percent of the gross annual revenues of the preceding fiscal year. G.S.159B-39. There may also be restrictions imposed on other enterprise revenue by contract, bond covenants, local acts, or grant agreements. None of these restrictions prohibit a local unit from using the enterprise revenue to compensate the general fund for any reasonable overhead expenses allocated to the enterprise activity. But they do constrain a unit’s ability to transfer the money from the enterprise fund. 

Consequences of Making a Transfer From an Enterprise Fund

Even if legally allowed, a unit should carefully consider whether a transfer from an enterprise fund (by means of an appropriation or loan) is appropriate. Transfers that occur frequently, or that involve a large amount of money, might be masking a problem with the unit’s financial condition. Relying on enterprise ratepayers to fund general government expenditures also may raise issues of equity, fairness, and accountability. This argument resonates particularly in jurisdictions where ratepayers compose only a subset of taxpayers of the unit or where ratepayers come from outside the unit’s territorial boundaries. Moreover, this practice could have negative financial implications for the unit, particularly related to issuing debt. Credit rating agencies are likely to look unfavorably upon any effort that destabilizes an enterprise fund.

In recent years the General Assembly has indicated that it strongly disfavors transfers from an enterprise fund. It enacted G.S. 159G-37(b) in 2014, which prohibits a local government from receiving loans or grants for water or wastewater purposes from the Clean Water State Revolving Fund (CWSRF), Wastewater Reserve, Drinking Water State Revolving Fund (DWSRF), or Drinking Water Reserve if the unit has transferred money from its water or sewer enterprise fund to the general fund to supplement the resources of the general fund. The prohibition only applies to transfers. It does not apply to legitimate reimbursements of the general fund for “expenses paid from that fund that are reasonably allocable to the regular and ongoing operating of the utility, including, but not limited to, rent and shared facility costs, engineering and design work, plan review, and shared personnel costs.”

The North Carolina Department of Environment and Natural Resources has interpreted this provision to apply only to transfers done in the fiscal year immediately preceding the year in which the loan or grant is being requested. (Current (as of June 2015) certification forms are available here and here.) The statutory language, however, does not contain a specific time period limitation on transfers. Thus it is at least possible that a transfer done this year could affect a unit’s ability to receive grants or loans from the state well into the future.