Nevada Power gains unexpected windfall

Monday, Sept. 20, 1999 | 11:16 a.m.

CARSON CITY -- The Nevada Legislature thought it protected electric customers of Nevada Power Co. and Sierra Pacific Power Co. by capping their rates for three years with the arrival of open competition.

But the two utilities may be getting the major initial benefit, at the expense of the consumer.

The state Public Utilities Commission on Friday found that Nevada Power Co. of Las Vegas is earning $14.2 million in excess profits a year. And Sierra Pacific of Reno is collecting $33.9 million more than it needs annually, the state agency found.

Under the 1999 law, the two companies will be able to continue to earn these profits from 2000 to 2002. And the commission can't step in and order lower rates before competition arrives next March.

Commissioner Michael Pitlock said the two utilities, which have merged, will have the advantage next year due to their excess earnings. But he said this is a "two-edged" sword.

"With the rates frozen for three years, costs could go up at the companies, causing profits to decline. Or the utilities could realize bigger profits if they are able to operate more efficiently under the rate cap.

"It's hard to tell what will happen to costs," Pitlock said. "It would have been nice to reset rates before the cap."

The utilities have the "unfettered ability" during these coming three years to earn as much profit as they can without raising rates, he said.

Sen. Randolph Townsend, R-Reno, the chairman of the Commerce and Labor Committee which drafted the deregulation bill, said lawmakers knew about the excess profits of Sierra Pacific but the overearning of Nevada Power was "a bit of a surprise."

Townsend said while the profits may look excessive, the utilities must go three years without a rate increase and will face additional costs. These companies, which will run transmission facilities under deregulation, must ensure there is reliability in delivering power. "They cannot have power failures on any consistent basis. That costs money."

Consumers have to have equal access. One homeowner may choose to stay with Nevada Power but a neighbor may sign up with another power supplier. "That costs money."

And there's the issue of growth. "The companies have to be able to maintain their systems and grow so more competitors will have access to the consumer. That may include a transmission line between north and south and that costs hundreds of millions of dollars.

"The dollars in these cases, although substantial, will be offset by these three requirements that are huge," Townsend said.

Under the legislation, the utilities agreed to a rate freeze in return for prohibiting the PUC from deciding if rates needed to be reduced.

Pitlock wrote the decision in the case of Nevada Power and Commissioner Judy Sheldrew authored the Sierra Pacific ruling. Chairman Don Soderberg agreed on both, making the vote unanimous.

In the regulated system, the PUC would have been able to tell the power companies to lower their rates. But that option isn't open any more. Nevada Power and Sierra Pacific could volunteer to lower rates to offset the overearnings.

Under the new system, those companies that want to sell electricity in Nevada will have to use and pay for the transmission and distribution lines of Nevada Power and Sierra Pacific. Pitlock said the commission will have to set the rates for use of those facilities.

"No one knows who will be the winners and losers will be over the next three years," Pitlock said. "The utilities are starting out ahead. Both of them are overearning going into the cap period."

Faye Andersen, a spokeswoman for Sierra Pacific Resources, parent company to Nevada Power, said the order issued by the PUC on Friday is the first phase of a process to determine how to set rates on the transmission and distribution lines in the new deregulated era.

"We just got the first order Friday and we haven't gone though all of it yet," Andersen said. "We're looking at all the options."

Andersen said Sierra Pacific, which has been under a rate freeze since 1994, has made a practice of sharing half its windfalls with shareholders and half with ratepayers whenever a windfall has occurred. She said the company hasn't taken a stance on the possibility of reducing rates.

Officials said the disclosure that both major utilities are earning excess profits could spur consumers to seek other power suppliers come next March rather than staying with those two companies, which until now have held a monopoly on the electricity business in Nevada.

Under the new law, a customer can remain with the current two electric companies without a change in rates for three years. Or the consumer could shop for lower rates. Nevada Power and Sierra Pacific also have the option of offering rates lower than the cap.

Pitlock said the commission, against the wishes of Nevada Power, raised the utility's depreciation schedule. If no action had been taken, Nevada Power would have earned $30 million in excess profits, instead of the $14.2 million, he said.

Nevada Power has a rate increase application before the commission, asking for $44.2 million in extra revenue to offset higher fuel prices it paid. It would mean an overall 4.9 percent increase and an increase for homeowners of 8 percent.

Hearings on that application should be in mid-November. This would not affect the profit picture since this is to recover the larger-than-expected costs Nevada Power paid for its fuel.

Sheldrew noted that Sierra Pacific will have to share 50 percent of its overearnings this year with its Northern Nevada customers under a previous agreement. But it will be able to keep the excess profits for three years when competition starts.

Among the next things to be decided in the case are the rates that the utilities will be able to charge for use of their transmission and distribution lines. The commission still sets the rates on this service. Other companies that want to sell electricity in Nevada must pay these two utilities the price set by the state commission.