Delay looking more likely for Nevada electricity deregulation

Friday, Feb. 11, 2000 | 11:11 a.m.

Stock price

The stock of Sierra Pacific Resources Inc. rallied briefly today but later was unchanged from Thursday's close, a 52-week low.

The stock of the parent company of Nevada Power Co. was unchanged at $13.94 in this afternoon's trading. Early today, the stock climbed to $14.125 before losing those gains by noon on Wall Street.

The Public Utilities Commission of Nevada last week denied a $110 million deferred energy rate increase for Nevada Power, prompting analysts to downgrade the stock's rating.

Nevada isn't ready to deregulate its electricity industry, experts agree.

As the prospect of starting competition by March 1 becomes less and less likely as that planned start-up date approaches, all sides in the complicated process agree on one thing -- it would be better to delay the start-up and get it right than to rush it and get it wrong.

Some say it may be best to phase in competition among different customer classifications. Others say that probably would occur without a mandate, since alternative sellers entering the market would most likely go after the most lucrative contracts -- the big power users.

Residential customers would likely be the last ones to reap the benefits of an open market, say experts familiar with efforts to start competition. And phasing in competition likely would put residential customers at the end of the line.

"A logical phase-in process could make a lot of sense," said Steve Rigazio, senior vice president of energy delivery for Nevada Power Co., Southern Nevada's present electricity provider. "But you still need to have rules in place to make it work."

Developing rules that are fair to everybody is what has bogged down the process to date.

Not only must the Public Utilities Commission of Nevada establish rules that will foster competition for all classes of customers, but it also must be fair to existing power companies and their shareholders as well as the alternative sellers entering the market.

The PUC and its staff must analyze the impact every rule will have on open competition. Meanwhile, different parties, ranging from attorneys for big electricity users like casinos and mines to the Bureau of Consumer Protection, which watches out for the interests of residential users, are jockeying for position in the rule-making process. The want to make sure the customers they represent get the best possible deal.

The big users have the most to gain from an immediate start-up since they have the biggest bills to pay.

Martha Ashcraft, an attorney representing three large casino companies in electricity deregulation proceedings, said the big users probably would be the first to enjoy the benefits of deregulation because alternative sellers entering the marketplace would be eager to attract their high-volume business.

Thousands of residential customers -- the mass market -- are harder to market and, in small numbers, would produce little benefit to a new competitor's bottom line. As a result, there aren't a large number of companies vying for residential customers' business.

But residential users already have received a benefit. State legislation is capping Nevada Power's utility rates for three years, so consumers are at least assured their bills won't go up.

Nevada Power still has one more rate increase on the horizon before the cap takes effect and regulators will begin hearings later this month on that rate hike proposal.

The rate increase proposal, a $44.3 million bid, is a deferred energy case -- the pass-through of fuel and purchased energy costs to consumers. Nevada Power originally sought a $110 million increase to cover anticipated expenses over the three-year life of the rate cap, but that was rejected last week by the PUC in a 2-1 vote.

Representatives on all sides of deregulation of the industry are agreed that the chances of starting competition March 1 are remote.

Earlier this week, Gov. Kenny Guinn, who will make the final decision, said he will wait right up to that date to make a decision while regulators hammer out the rules that are unresolved.

"We've run into some problems," Guinn spokesman Jack Finn said Wednesday. "I wouldn't say we're terribly optimistic (about beginning competition by March 1.)"

Consumer Advocate Fred Schmidt said the fact that electricity competitors haven't begun marketing their companies three weeks before the supposed start of competition is a good indication they don't think it's going to start on time either.

Nevada Power has gone from a "we'll-be-ready-when-everybody-else-is" tack to a more pessimistic outlook.

"It wouldn't be smart to get deregulation up and running in Vegas in the summer," said Michael Niggli, chief executive officer of Sierra Pacific Resources Inc., Nevada Power's parent company, in an interview with Dow Jones Newswires. "Cooler heads will prevail."

Nevada Power's Rigazio said the reason the company has shifted its outlook is that its management is convinced the rules for competition won't be in place in 2 1/2 weeks.

"The end goal we're trying to achieve is for consumers to have choice, to have the ability to buy energy from other suppliers," Rigazio said. "That can't happen in a reasonable fashion until everybody is satisfied that all the rules are in place. And, I don't think we're there yet."

Ashcraft, the casino industry's attorney, agrees.

"It certainly would be a virtual necessity to delay it," said Ashcraft, who represents the interests of Mirage Resorts Inc., Park Place Entertainment Corp. and Mandalay Resort Group. "The PUC staff and the parties are working very hard, day after day, week after week, in back-to-back sessions. But we're not quite there yet."

Regulators don't have a good roadmap on the journey to deregulation. Few of the approximately 30 states planning to deregulate are as far along as Nevada. Each state's utility regulators are taking different approaches toward turning monopoly-served markets into open markets. One of Nevada's neighbors, California, started deregulation a year ago in March, but most observers say its system has flaws Nevada should avoid.

The losers, if competition is delayed in Nevada, would be alternative sellers that have plans to enter the market March 1. But, as Schmidt pointed out, the new competitors haven't made much effort to advertise their plans, indicating they, too, are unconvinced it's going to happen soon.

Two companies that have come closest to moving into the residential market in Southern Nevada are Nevada Power Services -- Sierra Pacific Resources' affiliate company that would enter the competitive arena -- and Utility.com, which bills itself as the nation's first Internet electric company.

Nevada Power Services already has an office being set up at 5450 W. Sahara Ave. Steve Boss, Nevada Power Services' president, already has a staff of 60 ready to sell products and service customers as soon as competition begins.

Utility.com doesn't have a physical presence in the state. Chief Executive Chris King has said his company would be disappointed with a delay in the start-up, but he's expected it. The company isn't planning an advertising blitz until he's sure what prices he can offer customers.

Some of the big corporations that plan to serve the industrial power users, like Enron Corp., have to wait for decisions to be made by the PUC on a number of issues before they can determine what kinds of deals they can offer to the big users.

Among the issues that still have to be hammered out:

* The formation of an independent system administrator (ISA) to manage the state's electrical grid for the next three years. Nevada Power and Sierra Pacific has always made decisions on grid management in the past.

The role of the ISA is to assure that electricity is fairly offered to all the companies that enter the marketplace. After three years, that responsibility would be turned over to a regional organization and involve grids in other states.

The Federal Energy Regulatory Commission gave Nevada permission to form the Mountain West ISA to manage the flow of electricity over the state's transmission lines.

Rosalie Day, chairwoman of the board of directors of the Mountain West ISA, gave the PUC a timetable with three scenarios for starting up its operations. The earliest it forecasts starting: Sept. 15. And that's dependent upon the ISA being funded by April 1.

So far, it hasn't been determined how the ISA would be funded, and that's one of the critical issues on the PUC's agenda.

* The establishment of distribution rates. The highly charged debate involves whether Nevada Power, which will continue to maintain the distribution lines, should charge a flat rate or by the amount of power used. Consumer Advocate Schmidt strongly opposes the utility's flat-rate proposal, saying it has the potential of penalizing customers who use the least amount of electricity.

* A resolution of how Sierra Pacific Resources will sell its power plants. Selling the plants was one of the conditions of approval of the merger between Sierra Pacific and Nevada Power.

* Establishment of so-called "provider of last resort" rules. A series of rules needs to be adopted governing rates and regulations on consumers who choose not to choose when competition begins. Nevada Power will continue to serve those customers as the provider of last resort.

* The $44.3 million rate case. By dismissing the $110 million deferred energy case, the PUC set in motion the $44.3 million proposal. Nevada Power and the Utility Shareholders Association also promised to appeal the rejection of the other case in District Court.

* Several other unresolved issues. Rules still have to be drawn on stranded-cost recovery, billing procedures, customer information services and metering. Stranded costs, estimated at between $200 million and $800 million, involve investments in power supply contracts, power plants and transmission lines that aren't recoverable in a deregulated environment.

The PUC has some type of hearing scheduled on nearly every working day in February.

"There are definitely a lot of balls in the air," Ashcraft said. "Until there is a little more certainty to the landscape, prospective sellers will wait on the sidelines and analyze risks and benefits before they come in the door."

"We feel that the key to doing this right is to get all the rules ready first," Rigazio said. "You hate to pick a date. It's better to get something in place that the commission and the intervenors are satisfied with and then opening the doors to competition."

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