Nevada Power’s massive hike to be debated

David Strow

Monday, Dec. 3, 2001 | 10:33 a.m.

As energy prices continue to slide nationwide, Nevada Power Co. proposed the biggest utility increase in the state's history Friday -- a $921 million rate hike, a move that would raise power bills across Southern Nevada by 21 percent over the next three years.

For the average residential customer, summer power bills will increase from $185 to $215 per month, company officials said.

The move, anticipated for months, has infuriated state and county officials, and they're vowing to fight the whopping increase. But Mark Ruelle, president of Nevada Power, says it's necessary if reliable electric service is to continue in Southern Nevada.

"This isn't about saving the company. This is about keeping Nevada safe and keeping the lights on," Ruelle said. "We want to make sure the lights stay on. That's our first and foremost priority."

But it's a line Tim Hay, the state's consumer advocate, said he's heard before. Twice in the past 18 months, Nevada Power has said it needed substantial rate hikes if it was to survive the West's energy crisis. Each time, state officials conceded, and Nevada Power was able to raise rates a total of 26 percent.

Hay believes the company has been "crying wolf" -- and fears this latest rate hike request could have a devastating effect on Nevada's already struggling economy.

"If imprudence has occurred, regardless of the impact on the company, the cost should not be borne solely by the ratepayers," Hay said. "You can't just suck a billion dollars out of the economy and not expect some impact."

The roots of this rate hike request trace back to early this year, when wholesale electricity costs were soaring across the Western United States. Nevada Power doesn't have enough power plants to supply the needs of all of Southern Nevada, so it acquires much of this electricity on the wholesale market from other utilities.

Under an October 2000 settlement with state officials, Nevada Power was locked into controlled, monthly rate hikes. But wholesale electricity costs shot up far beyond Nevada Power's authorization to raise rates.

The result: Nevada Power was forced to sell power to Southern Nevada customers for less than it had paid for it on the wholesale market. By spring, Nevada Power had lost an estimated $300 million on power sales to its customers. The company said its ability to borrow money was being threatened by the situation, putting it at risk of insolvency.

The Nevada Legislature intervened in May with a bill that threw out the October settlement and froze electric rates. Nevada Power continued to take losses on the power it sold to Southern Nevadans, but it was able to defer losses taken from March 1 to Sept. 30 in a special account. Paying back this special account is the goal of Nevada Power's latest rate hike request.

Since the special account is considered an asset that can be collected on in the future, Nevada Power's massive losses ended, and the company once again was able to borrow cash. But as wholesale power rates continued to soar this summer, the account built up quicker than anyone had expected.

The expectation, at the time, was that the deferred account would total no more than $500 million, and that a 10 percent hike would be sufficient to pay it back.

Hay argues that could have been the case, had Nevada Power locked in rates earlier by buying long-term power contracts. By waiting too long to buy power for the summer, Nevada Power brought much of the huge losses on itself, Hay said.

And since wholesale rates have since plummeted, Hay believes Nevada Power should be able to pay off the deferred balance simply by keeping its rates at current levels.

Hay isn't alone in this position. Gov. Kenny Guinn and Clark County Commission Chairman Dario Herrera have both criticized the scope of Nevada Power's request, and are demanding an explanation.

"It seems as though initially Nevada Power is attempting to recovery their costs for past mismanagement of the company," Herrera said recently. "They want to finance the recovery of those costs on the backs of our constituents."

Ruelle said he understands the frustrations of officials and ratepayers. But, he notes, deregulation was on the way as late as last September, the company believed it wouldn't be obligated to serve all of its customers because of deregulation -- and therefore couldn't lock in rates at lower prices at that time. Rates shot up earlier this year, hurting the company -- but Nevada Power saved customers $1 billion to $2 billion by locking in power contracts before prices topped out, Ruelle said.

Without the rate increase, Nevada Power says it will be in a perilous position. Standard & Poor's, the nation's largest corporate credit rating agency, has already threatened a significant downgrade in the company's credit rating if Nevada does not give Nevada Power the requested rate hikes.

A downgrade to "junk bond" status would mean more than higher interest rates for Nevada Power, Ruelle said. It would mean Nevada Power would have difficulty raising the money it needs to keep expanding Southern Nevada's power system and to buy power -- and it would mean other power companies might simply refuse to sell electricity to Nevada Power, Ruelle said.

"That's an unthinkable scenario," Ruelle said.

But Hay suggests it might not be the worst thing that could happen. Since wholesale prices have plummeted, Hay believes Nevada Power could find companies willing to sell it power at reasonable rates -- even if the utility was in Chapter 11 bankruptcy. Other utilities have gone into bankruptcy and emerged stronger companies, he said.

"It wouldn't be the catastrophic end of life in Nevada if our utility goes into bankruptcy," Hay said.

That position infuriated Ruelle.

"That is the most reckless and irresponsible comment I've ever heard from a public official, and is certainly not in the best interest of the customers of Nevada Power," Ruelle said.

The rate case will be heard by the Public Utilities Commission of Nevada in February. If Nevada Power is successful in getting a hike, it would go into effect in April.

But it appears doubtful the case would end there, no matter which way the PUC goes. Though the PUC's decision would go into effect, either side could appeal the decision to a Nevada district court, then the Nevada Supreme Court.

"If the PUC renders a decision we feel isn't supported by the record, we'd be very willing to take this to court," Hay said.

Ruelle wasn't as willing to guarantee an appeal.

"If it gets to the point where we need to resolve this by legal means, that won't be the story," Ruelle said. "The story will be what happens to Nevada."