North Carolina Department of Justice
North Carolina Department of Justice
North Carolina Department of Justice
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REPLY TO: Leonard G. Green

Utilities Unit Telephone (919) 716-6000 FAX (919) 716-6757

October 29, 2003

Senator Walter H. Dalton 523 Legislative Office Building Raleigh, N.C. 27601-2808

Senator R. B. Sloan, Jr. 406 Legislative Office Building Raleigh, N.C. 27601-5925

Re: Request for Attorney General’s Advisory Opinion

Dear Senators Dalton and Sloan:

Thank you for your letter of October 2, 2003, requesting an advisory opinion concerning certain wholesale power transactions between electric membership corporations and other persons. Your letter states the following facts and question.

Facts

Four electric membership corporations organized under Article 2 of Chapter 117 of the North Carolina General Statutes to render service to their members (“EMCs”) wish to restructure their purchase of wholesale electric power. Each of the EMCs currently purchases power from North Carolina Electric Membership Corporation (“NCEMC”), an electric membership corporation organized to furnish or cause to be furnished bulk electric supplies at wholesale. Each EMC plans to contract with NCEMC to purchase a smaller quantity of power from NCEMC and to enter into a new contract with a third party, “Energy Supplier,” to purchase power. These new arrangements are sought to provide the lowest cost of power to the EMC and thus to its members.

Under the proposed power purchase agreements with the Energy Supplier (the “Purchase Agreements”), the EMCs will make available to the Energy Supplier their rights to electric power from NCEMC. The Energy Supplier may (but is not required to) utilize this right to electric power from NCEMC to meet the Energy Supplier’s obligations to supply power under the Senator Walter H. Dalton Senator R. B. Sloan, Jr. October 29, 2003 Page 2

Purchase Agreement. The Purchase Agreement also provides that if the amount of power required to be purchased by the EMC from Energy Supplier under the Purchase Agreement exceeds the EMC’s actual energy requirements, the Energy Supplier must buy back the excess power from the EMCs.

Question

Do the EMCs have the corporate power and authority under Chapter 117 of the North Carolina General Statutes to enter into the Purchase Agreements with the Energy Supplier, under which the EMCs will make available to the Energy Supplier the EMCs rights to electric power and energy under the NCEMC contracts and make incidental sales of excess power to the Energy Supplier?

For the reasons that follow, it is our opinion that North Carolina’s statutes grant the EMCs the necessary authority to engage in such wholesale power transactions that are consummated in order to provide economical electric service to EMC members.

A corporation is an entity created under state law. Therefore, its purposes and powers are governed by state law. A corporation organized under North Carolina’s Business Corporation Act or Nonprofit Corporation Act normally has the purpose of engaging in any lawful activity, although a more limited purpose may be specified in its articles of incorporation.

N.C.G.S. §§ 55-3-01(a) and 55A-3-01(a); Robinson on North Carolina Corporation Law, 5th Edition, §§ 3-1 and 3-3. However, a corporation engaging in an activity that is regulated by another statute is subject to all limitations of the other statute, including limitations on the purpose of the corporation. N.C.G.S. §§ 55-3-01(b) and 55A-3-01(b); Robinson § 3-1(a).

EMCs are authorized and governed by Article 2 of Chapter 117. These statutes permit the establishment of EMCs as limited-purpose nonprofit corporations to provide electric service to their members only. N.C.G.S. § 117-16. In fulfilling that purpose, EMCs are directed to provide electric energy “...at the lowest cost consistent with sound economy and prudent management of the business of such corporations.” N.C.G.S. § 117-10. In N.C.G.S. § 117-17, EMCs are given the general power necessary or requisite to accomplish their corporate purpose, with the further provision that no enumeration of specific powers is to be construed to limit this general power.

In N.C.G.S. § 117-18, specific powers are granted EMCs, where such powers are necessary or convenient to enable them to carry out their purpose, including:

(3) To acquire, hold and dispose of property, real and personal, tangible and intangible, or interests therein, and to pay therefore in cash or on credit, and to secure or procure Senator Walter H. Dalton Senator R. B. Sloan, Jr. October 29, 2003 Page 3

payment of all or any part of the purchase price thereof on such terms and conditions as the board may determine.

(8)
To make any and all contracts necessary or convenient for the full exercise of the powers in this Article granted, including, but not limited to, contracts with any person or federal agency, for the purchase or sale of energy;...
(12)
To perform any and all of the foregoing acts and to do any and all of the foregoing things under, through or by means of its own officers, agents and employees, or by contracts with other persons or federal agencies.

Pursuant to these specific powers, EMCs are authorized to contract with any person for the purchase and sale of energy. Since an EMC’s primary purpose is retail sales to its members, the provisions of G.S. § 117-18(8) and (12) appear to refer to wholesale purchases and sales of energy. This is consistent with the EMC’s duty to provide the most economic and least cost service to its members. Buying bulk power to meet fluctuating loads means there will be excess power available at times. Thus, EMCs need to be able to take their excess power to the wholesale market for resale, trade or credit. However, such wholesale power trading activities must be necessary for an EMC’s service to its members, and not a separate corporate endeavor. See N.C.G.S. § § 117-17 and 117-18.

In reaching our conclusion, we have fully considered the possible effects of N.C.G.S. § 117-16 and § 117-20 on the question presented. In § 117-16, the last two sentences specify certain powers and activities for a corporation whose “principal purpose is to furnish or cause to be furnished bulk electric supplies at wholesale...” These sentences were added in 1979 to allow NCEMC to enter into joint arrangements with other power suppliers for the purchase and sale of bulk power, including joint ownership of bulk power supply properties. The wording and timing of this addition to the statute indicates the legislature’s intent to allow NCEMC to enter into joint financing, construction and ownership of generating facilities with investor owned utilities, a course of action that NCEMC did pursue after the amendment to § 117-16. It does not state, however, that only NCEMC can buy and sell power at wholesale.

Under § 117-20, EMCs must conduct a vote of their members in order to sell, encumber or dispose of EMC property, except merchandise, or property not in excess of 10% of the value of the corporation’s total assets, or property which the board judges not to be necessary or useful in operating the corporation. Since the business of an EMC is to sell electric power to its members for their use, an EMC’s “merchandise” is electric power. Thus, an EMC’s acquisition, trading and resale of wholesale power falls within the merchandise exception of the statute.

Senator Walter H. Dalton Senator R. B. Sloan, Jr. October 29, 2003 Page 4

This opinion does not include any assessment other than the EMCs’ authority under North Carolina’s statutes. For example, it does not include any assessment of particular contracts, rights or restrictions created by such contracts, or requirements that may be imposed under federal law by the Federal Energy Regulatory Commission.

We hope that the information provided in this advisory opinion is helpful.

Yours truly,

Joshua Stein Senior Deputy Attorney General

Leonard G. Green Assistant Attorney General