Nevada Power executive defends sales

Monday, Feb. 12, 2001 | 11:21 a.m.

Preventing Nevada Power Co. and its sister company from selling their power plants could be more expensive to ratepayers than proceeding with the sales as planned, the company's top executive says.

Walter Higgins, chief executive officer of Sierra Pacific Resources Inc., Nevada Power's Reno-based parent company, said changing course on the sale of the plants, as proposed by some legislators, ultimately would cost the company about $1.1 billion over two years -- a figure the state's consumer advocate disputes.

Higgins, appearing on Las Vegas One's "POV Vegas" television news show and before the Las Vegas Sun's editorial board Friday, said the company is waiting to see how the Nevada Legislature reacts to an energy crisis spurred by California's flawed attempt to deregulate electricity.

Higgins says the power company is caught in the middle of a bad situation with few good options.

When Nevada set out to deregulate its own electrical industry, the Legislature and federal regulators ordered Nevada Power and Sierra Pacific Power Co., the company's Northern Nevada counterpart, to divest themselves of their power plants. The reasoning was that the existing power companies would have too great a competitive advantage over potential competitors in a deregulated environment if they were allowed to keep the plants.

So, instead, they were directed to sell their power generators.

Today, economic conditions have changed and government leaders, from County Commissioner Yvonne Atkinson Gates to Sen. Randolph Townsend, R-Reno, are saying Nevada Power and Sierra Pacific should hang onto their plants to avoid losing control of power generation within the state.

But the two utilities have a problem with that -- they've already signed contracts with companies that want to buy some of the seven power plants and their minority stakes in two other facilities.

In November, Nevada Power announced the sale of its 740-megawatt natural gas-fired Clark power plant and its 605-megawatt coal-fueled Reid Gardner plant to NRG Energy Inc., Minneapolis, and Dynegy Inc., Houston.

In October, Sierra Pacific sold its 50 percent interest in the 522-megawatt coal-fired North Valmy plant to NRG Energy.

And, in May, Nevada Power agreed to sell its 14 percent interest in the Mohave Generating Station to AES Corp., Arlington Va. That sale eventually was blocked by California regulators, since California utilities hold other ownership positions in the plant.

Other plants are scheduled to be sold later this year. Nevada Power and Sierra Pacific expect to generate about $1.7 billion from the sales of the plants or their percentages of ownership.

When the sales were announced, the Nevada utilities pointed out that they had negotiated favorable power buyback contracts with the plant buyers as part of the transactions.

Those buyback plans would supply the state cheaper power until deregulation was to begin by March 2003 and they lock the plant buyers into selling electricity to Nevada Power at 1998 rates.

"If we don't sell the plants now, those favorable contracts are gone," Higgins said.

In addition, canceling the sales would almost certainly result in breach-of-contract lawsuits being filed against Nevada Power, Sierra Pacific and possibly the state by the jilted plant buyers.

Higgins said the utility loses in three ways if the plants aren't sold: The utilities won't see any revenue from those sales; they'd be at risk in court; and, they'd also have to buy fuel to generate electricity at rates that now are more than 60 percent higher than they were a year ago.

The total cost: about $1.1 billion, Higgins says.

But Consumer Advocate Tim Hay says he doesn't agree with Higgins' cost estimate and contends that things would be worse for Nevada if the utilities were to lose control of those power generators at the present time. Hay's office last month asked the Public Utilities Commission of Nevada to put a hold on the plant sales until the economics could be analyzed.

Publicly, Nevada Power is taking a wait-and-see approach to the resolution of the matter, but Higgins said his company is prepared to switch gears and run the power plants if that's what is directed by lawmakers.

When California blocked the sale of its utilities' plants, the move affected Sierra Pacific power generators in Northern Nevada, since they provide electricity to residents on the California side of Lake Tahoe. Higgins said the California Legislature intends to amend its legislation so that California's policies don't impact Nevada operations.

Clark County's Gates, who appeared on "POV Vegas" with Higgins, said the county is considering development of a power plant and establishing a utility to protect citizens of the county from power shortages and economic chaos resulting from the energy crisis.

Meanwhile, the Nevada utility companies are scrambling to avert some of the economic problems facing their counterparts in California. Their proposed comprehensive energy plan, which includes a record rate increase, was unveiled last month and would raise an estimated $300 million a year. It also would raise residential utility rates by an estimated 17 percent on top of increases that have occurred monthly since August.

Higgins said the increase is necessary to keep the company afloat. Hay, who opposes the increase, wants the PUC to suspend an increase and study the proposal thoroughly before making a decision. But by then, Higgins says, it may be too late. He said if nothing is done, Nevada Power would be in the same position as Pacific Gas & Electric of California within eight months.

PG&E's miserable financial condition has stymied the company's ability to buy fuel and power on the spot market, which has led to a policy of rolling blackouts in that state.

The Nevada Legislature, which is still smarting from a global settlement signed by the utilities, the PUC and the consumer advocate, is soliciting testimony in hearings in Carson City to determine what to do next. Many lawmakers contend that the settlement was an end run by Sierra Pacific and Nevada Power around a three-year rate freeze mandated by state law.

The settlement was a resolution to suits filed by the utilities contending that the state's deregulation law was unconstitutional. For dismissing the suit, the utilities were permitted to pass fuel and purchased power increases on to consumers on a monthly basis. Those are the monthly rate increases consumers have seen since August.

The global settlement agreement was the subject of a letter PUC Chairman Don Soderberg sent to Higgins Friday. Soderberg contends that the companies have not lived up to their end of the bargain by not dismissing their lawsuit.

Soderberg said if the suits aren't dismissed by Wednesday, the PUC would go back to court to argue a breach of the agreement.

Meanwhile, some lawmakers, like Townsend, have called for the utility companies to take a more aggressive role in protecting ratepayers.

Townsend and Hay have said the company should consider cutting the 25-cent-a-share quarterly dividend paid to shareholders. Utility executives say that could potentially devalue the stock and the company and affect its credit rating.

Steve Rigazio, president of Nevada Power, said the company saved about $55 million last year, $30 million of it in the merger of Nevada Power and Sierra Pacific, and $25 million more in miscellaneous cost-saving measures.

Rigazio said the company isn't looking at cutting employees since a number of workers already left when the two utilities merged and Nevada Power remains one of the fastest-growing utilities in the country.

He also said he wouldn't recommend cuts in the company's annual tree-trimming budget, even though there were no major storms last year and there was little spent for emergency trimming in 2000.

Rigazio and Higgins said any savings that would be realized in cutting personnel would be relatively insignificant compared with the large deficits being racked up in fuel and purchased-power costs.

Meanwhile, the PUC has approved a measure to intervene in matters before the Federal Energy Regulatory Commission concerning the California market. The ruling, approved Friday, gives the PUC's lawyers the authority to make filings on issues that ultimately could affect Nevada ratepayers.

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