Issue 10

Territorial Integrity Act (TIA)

During the 1965 Legislative Session, the Territorial Integrity Act was passed at the urging of the state's Rural Electric Cooperatives (REC). The stated purpose of the legislation was to prevent investor-owned utility (IOU) companies, like MDU, Xcel Energy Company (formerly NSP) and Otter Tail from interfering with the RECs mission of serving rural areas. This legislation has effectively allowed RECs to serve areas newly annexed to cities at the exclusion of investor-owned utilities.

How does that work? Well, because cooperatives can locate facilities at will in rural areas, they will have minimum facilities located in most areas near a city. Therefore, when a new area of a city is annexed, the REC already has equipment located in the area, and any installation by the IOU will be duplicative. Clearly, this prevents the IOU's from growing with the city and they are locked into an existing base with little chance of obtaining new electrical customers as a city grows.

We must keep today's territorial disputes in historical perspective. During the early 20th. Century, city leaders were aware they needed an unlimited supply of electrical power for their cities to grow. Further, they understood their constituents, for the most part, were struggling to make a living and they could ill afford a large tax increase to provide electricity to the community. As an alternative, private investors offered their money and expertise to electrify America in exchange for an expected return on their investments.

Cities struck franchise agreements granting companies exclusive territories in which to operate an electrical utility company. In exchange for providing service, the electric utility company agreed to provide power, as a regulated monopoly, to anyone within the city whenever it was requested. It seems to make sense that, in exchange for these risks, the investor owned utility's territory should expand as cities expanded. After all, if adequate supplies of electricity had not been available, cities would not have been able to grow as they did early in the century. Investor-owned utilities have provided good service at a fair price over many years and should be allowed to grow as cities grow. IOUs should not have their future restricted by the Territorial Integrity Act and unfair competition.

The way its looks today, the Territorial Integrity Act seems inconsistent with the Rural Electrification Administration Act, under which the REC's were subsidized. Congressman Sam Rayburn of Texas, the author of the Act in1935 said: "May I say to the gentlemen that we are not in this bill intending to go out and compete with anybody. By this bill we hope to bring electrification to people who do not now have it. This bill was not written on the theory that we were going to punish somebody or parallel their lines or enter into competition with them."

REC's serving North Dakota's towns and cities seem even more at odds with the intent of the REA Act because most of their new load is in upscale urban residential neighborhoods, industrial parks, and shopping malls, all located inside city limits. For example, an REC now serves about one-fourth of the incorporated area of Bismarck, and West Acres Mall (North Dakota's largest retail area) located inside the city of Fargo is served by a REC. We think this is a gross misapplication of the policy behind rural electrification.

As a matter of fact, many of the REC's in the state have dropped the word "rural" from their cooperative name to more accurately reflect the territory they are now serving.

Electric cooperatives were formed to help farmers get electricity they could not afford if they had to pay the true cost. Therefore the federal government created programs funded through tax dollars to electrify the countryside. This was a truly admirable goal and the rural areas would most likely not have received electrical service as quickly as it did without this help. But our economy has changed, and the federal programs haven't. Today REC's are using tax dollars to directly compete with investor owned utilities, and that isn't right.

Some of the most recognized federal subsidies the REC's receive are an exemption from federal, and then of course, state income tax. They are able to receive long term federal loans at government subsidized interest rates and, they can purchase energy from federally operated hydroelectric dams at prices far below current market value. Further, they receive preferential property tax treatment when compared to the taxes paid by investor owned utility companies.

Furthermore, as we see property devastated by floods and other acts of nature, FEMA support comes into play. When an IOU experiences losses associated with a flood or other weather related tragedy, they must pay the cost of repairs from company assets and are not entitled to participate in FEMA programs. However, when rural electric organizations suffer similar losses, they are able to receive FEMA disaster relief programs of grants and low interest loans even when they are serving the same urban territory as an IOU, like in Grand Forks or Fargo.

If rural electric cooperatives want to compete with IOUs in urban markets, they should give up federal subsidies and compete following the same rules, regulations, and laws as investor owned utilities.