Nevada Power dropping retail business

Wednesday, March 1, 2000 | 11:23 a.m.

Nevada Power Co. is getting out of the business of selling electricity directly to businesses and consumers. The company intends to become strictly a wholesale distributor of power.

In so doing, Nevada Power and its parent company said today they're pulling the plug on their retail energy subsidiary in a cost-cutting move aimed at bolstering the utility's faltering stock price. Forty people will lose their jobs as a result.

Sierra Pacific Resources Inc., the Reno-based parent company of Las Vegas-based Nevada Power Co., announced late Tuesday it is withdrawing its retail energy license application with the Public Utilities Commission of Nevada.

In response, an analyst following the company from A.G. Edwards, St. Louis, upgraded the company's stock rating.

Douglas Fischer of A.G. Edwards upgraded the stock from a "maintain position" rating to "accumulate." Fischer had downgraded the stock from "accumulate" to "maintain" on Nov. 8.

The stock, which has steadily declined in value since July 28, when Nevada Power merged with Sierra Pacific, was trading this morning at $13.75, up 12.5 cents from Tuesday's closing price of $13.625.

At the end of July, the stock was at its 52-week high price of $27. The issue steadily declined, hitting its 52-week low of $12.50 in early February after the Public Utilities Commission of Nevada rejected a rate increase request of $110 million.

Sierra Pacific said it would not pursue the retail energy services business which it had proposed to conduct through a subsidiary, Sierra Pacific Energy Co. Sierra Pacific Energy was planning to do business in Southern Nevada as Nevada Power Services.

Nevada Power Services President Steven Boss said Tuesday he was asked to resign Monday afternoon. Forty employees will lose their jobs as a result of the decision and the company is in the process of negotiating severance packages for them.

Michael Niggli, chief executive officer of Sierra Pacific Resources, was in New York today explaining the company's strategy to Wall Street analysts. He said the shutdown of Nevada Power Services will take two to four weeks to complete.

He would not disclose how much the company has invested in the retail affiliate to date, nor how much it has spent on advertising the company, which had set up an office at 5450 W. Sahara Ave.

A three-paragraph statement issued by Sierra Pacific Resources Tuesday night said the company would "concentrate on the core businesses of electric distribution and transmission through its utility subsidiaries."

Steve Rigazio, senior vice president of energy delivery for Nevada Power, said the company "is looking to reduce costs and expenses wherever possible" in the wake of the PUC's decision to deny Nevada Power's request to recover $110 million in claimed expenses.

The company has appealed the rejection of the $110 million rate case. If that appeal fails, Nevada Power rates could still rise because the state allowed it to apply for a $44.3 million increase when it rejected the $110 million hike. Hearings began last week and will continue Thursday and Friday.

The company says deferred energy cases normally are treated as a simple pass-through of costs by the company to the consumer, allowed annually under state regulations. Niggli said the company does not profit from those rate increases, but investors perceive the rejection of the rate increase as a loss of potential revenue.

Niggli said two key events -- the rejection of the rate increase and Gov. Kenny Guinn's announcement that electricity deregulation would be postponed indefinitely in the state -- were behind the decision to withdraw from the retail marketplace.

Niggli noted that customers will continue to be served by Nevada Power for several months because the company is still the monopoly utility in the Southern Nevada market.

He said the company intends to be the "provider of last resort" -- the company that would sell power to customers who do not choose an alternative electricity provider when competition begins.

Right now, state regulations are open-ended as to how long Nevada Power could remain as the provider of last resort. Further details are being hashed out in hearings scheduled later this month. New utility companies can apply for provider-of-last-resort status in mid-2001, but most experts don't expect many companies to seek it.

Ron Tanner, a utilities analyst for Legg Mason Co., Baltimore, said the briefing by Niggli in New York was short on details, primarily because the company hasn't completely formulated its strategy. But the company knows that cutting its losses in retail energy is an important component.

"The company said it's going to cut back on advertising and exit the retail business," Tanner said. "With the delay in deregulation, this saves them some money this year."

Tanner said the company realized that it was in the position of having to make a significant investment in retail in order to retain the customers it already had -- but that in order for the company to continue to enjoy the profits it had made in the past, it had to cut costs.

Key government officials said they understand the company's strategy and believe the decision is in the best interest of shareholders.

"They have to run their business the way they see fit," said PUC Chairman Don Soderberg, who cast a key swing vote opposing the $110 million deferred energy rate increase. "It was a business decision in the best interests of shareholders."

Consumer Advocate Fred Schmidt said it was a prudent business decision and that he wouldn't be surprised if the company eventually reapplies to serve retail customers after deregulation issues are resolved.

"Looking at their current financial situation, I think it makes sense that this (retail sales) is the type of business they would pull back on," Schmidt said.