Power deregulation not likely to cut bills

Sunday, Nov. 14, 1999 | 9:34 a.m.

Nevada is scheduled in March to open its electricity market to competition, part of a trend among states nationwide to deregulate the power industry.

But with less than four months to go only two companies other than Nevada Power Co. have applied for licenses to sell electricity to local residential customers, and one of those applicants is a big question mark.

Lack of competition could mean, at least in the short run, that residential customers shouldn't see much difference in their electricity rates. The big winners are expected to be large commercial customers such as resorts and mining companies.

Alternative sellers who do business in Southern Nevada will purchase their energy from regional companies that generate electricity through such sources as coal, nuclear or solar power. The energy will then pass through a transmission system and distribution lines to the residential consumer.

Nevada Power and Sierra Pacific Power Co. of Reno, which merged this summer, will still own the transmission system and distribution lines but be required to lease them to the alternative sellers. The lease rates for the transmission system will be established early next year by the Federal Energy Regulatory Commission. The lease rates for the distribution lines are expected to be set in January by Nevada's Public Utilities Commission.

Though residential customers could eventually receive significant rate cuts, one short-term pessimist is state Consumer Advocate Fred Schmidt.

"I'm not optimistic that we will see very much competition occur just because we open up the gates on March 1," Schmidt said. "Customers won't have a strong desire to move to another company if they're happy with their utility bills now."

But others, such as Nevada Power executive Dwight Etheridge and Lathia McDaniels, a member of the utility's Community Advisory Panel, expect plenty of competition.

Etheridge, leader of Nevada Power's industry restructuring team, said the amount of competition will depend in part on deregulation rules yet to be established by the Public Utilities Commission.

"I would expect more entities to apply for licenses as more rules about the deregulation are known," Etheridge said. "But I don't expect a tremendous amount of switching (to alternative sellers) by customers initially."

McDaniels, a Las Vegas businessman agrees.

"Some electricity providers coming into Nevada will have to put on P.T. Barnum advertising to get people to change," McDaniels said.

Nevada already has lower residential electric rates than roughly two-thirds of the other states. That's partly because of its access to Hoover Dam and avoidance of high-cost nuclear power generators.

A 1997 study by Data Resource Center International of Boulder, Colo., showed that Nevada Power had a residential rate of 6.3 cents per kilowatt hour and that its average household paid $809 that year for electricity. Reno residents served by Sierra Pacific paid 8.8 cents per kilowatt hour in 1997 but had an average household bill of only $680 that year. Reno residents have lower bills because that city has far milder summers.

The lowest rate in the survey belonged to the Boulder City Electric Distribution System, which charged its residential customers only 3.8 cents a kilowatt hour, a rate they were able to offer because of their proximity to the dam. On the other end of the scale was the Fallon Municipal Electric System in Northern Nevada, with a rate of 9.7 cents.

Nevada Power's rate has since climbed to about 7 cents per kilowatt hour because of two rate increases since 1997. The state's average, which was 6.77 cents in 1997 and 13th lowest in the nation, is about 7.1 cents today. That would still place Nevada among the 20 cheapest states for residential electricity.

But a low rate is just one reason why other companies may steer clear of Nevada.

Another is uncertainty over the amount of money Nevada Power will seek from customers to recover "stranded" costs associated with its power plants and distribution lines.

The state's deregulation law will also allow Nevada Power to recover certain expansion costs if those investments were made without deregulation in mind.

New Energy Southwest LLC is a Phoenix, Ariz., company that has applied for a license to sell electricity to Nevada residents and other customers. But New Energy will not enter this market if the stranded costs are so high that they offset any potential rate reductions that can be passed on to consumers, company spokesman Dave Potter said.

"Competition naturally drives costs down in the long term, but looking at the stranded costs it is hard to say whether they will ultimately affect homeowners," Potter said.

The Public Utilities Commission is not expected to address potential stranded costs until at least the end of the year. Potter, for one, said he doesn't expect those costs to be high because "your plants are primarily gas and coal-powered, which are very economical."

Even so, New Energy's potential entry into the Southern Nevada market is iffy because the company was purchased by energy giant AES Corp. after applying in July for a Nevada license. Potter said it remains uncertain whether AES will want to compete in Nevada.

But utility.com, the only company so far that is a sure bet to compete with Nevada Power for local residential customers, is predicting at least some savings because all of its business will be transacted over the Internet. Consumers will also be able to save money by using their computers to pay their bills because utility.com won't have to handle much paperwork, which reduces its costs.

So says company Chairman Chris King. His Albany, Calif., company, formed last spring, believes homeowners who pay at least $100 a month for electricity could see their bills reduced by at least $10. Other residential customers who pay lesser amounts, such as apartment dwellers in the $30 to $50 a month range, would save less money though their bills would be reduced by the same percentage.

"Nevada is right next to California so that makes it very easy for us to work there," King said. "We're already confident that we will be offering lower rates. Competition in every other state has led to price reductions."

Utility.com customers not only will be able to sign up for service and pay their bills over the Internet, they'll be able to track their energy use online, choose their billing date and have a voice in the charities the company supports. King said he will begin advertising the company in Southern Nevada early next year.

If California is any indication, however, utility.com could have a tough time carving into Nevada Power's market share. Since California deregulated its electricity market in March 1998, alternative sellers have cornered less than 2 percent of the residential market, Schmidt said.

Schmidt said existing California utilities were able to keep their customers because they agreed to 10-percent rate reductions. Those savings were reduced somewhat by the stranded costs passed on to consumers but Schmidt said the ability by new sellers to compete was made difficult by the utilities' willingness to lower rates.

Though many other states have seen residential electricity rates fall 10 to 15 percent through deregulation, Schmidt failed to convince the Nevada Legislature to require a similar rate reduction in this state. He predicted that big commercial customers, such as the resort and mining industries, will see the largest electricity price cuts in Nevada.

"They're the ones who have pushed deregulation," he said.

The Legislature did agree this year to prohibit Nevada Power from raising its residential rates from March 2000 to March 2003, though the utility may reduce its rates during that period. As the designated provider of last resort in the Las Vegas Valley, Nevada Power will remain the seller of electricity for customers who do not choose an alternative.

King said he believed utility.com will start up better in Nevada than California because his company has time to prepare for deregulation here. By the time his company entered the California market last spring, deregulation there was already a year old and customers had made their choices. Still, King said his company's customer base has doubled each month of its existence.

"We'll be right there when the market opens up in Nevada," King said. "It's a no-lose proposition for consumers because it's the same reliable power for less money."

The merged utility meantime has also applied to the state for a license for Nevada Power Services. This proposed spin-off company would compete as an alternative seller and therefore wouldn't be bound by the three-year rate cap that will apply to the parent company.

Etheridge said that even if residential customers initially don't get price breaks through deregulation, they may get improved service. Examples include the possibility of combining their electricity bill with other utility bills, and getting special rates for using appliances during off-peak hours.

"We've got excellent people who will find innovative ways to find value for consumers," Etheridge said of residential users. "I would expect that the short-term benefit for consumers is that they will have more options but not a significant reduction in price early on."

With utilities expected to blitz the public with media and direct mail advertising early next year, McDaniels advised that the public needs to educate itself about deregulation.

He said customers will want to know not only the utility's electricity rates, but also the terms of its contracts with consumers and the source of its power. Environmentally conscious residents, for instance, may choose to buy their electricity from a company that relies on solar or wind power rather than coal or nuclear energy.

"Deregulation for me means freedom of choice," McDaniels said. "It gives me the chance to purchase electricity at the best price and choose the company with the best overall program."

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