Selling power plants could be costly to state

Wednesday, Feb. 14, 2001 | 11:07 a.m.

The state's consumer advocate says Nevada Power Co. customers would wind up paying more if the company sells its nine power plants, a strategy that's in place but may be reversed by the Nevada Legislature.

Consumer Advocate Tim Hay, in an analysis of divestiture savings being prepared for lawmakers this week, said Nevada Power's contention that keeping the plants is a more expensive option is flawed because it only considers short-term costs and not a more meaningful time frame.

"Generally, the company has two alternatives: divest its generating resources and secure purchased power to replace the divested capacity -- or keep its generating resources and secure fuel for its generating units," Hay said in a draft report.

Nevada Power was required to divest the plants as a condition of its merger with Sierra Pacific Resources Inc., Reno. The company already has begun the process of putting the power generators out to bid and, on some plants, has named a successful bidder.

The final sale of each plant is subject to approval by the Public Utilities Commission of Nevada and Hay has moved to delay action until the analysis is completed.

The state's utility experts and lawmakers are having second thoughts about selling the plants because conditions have changed dramatically in the time since the merger was planned. Since the merger, completed in mid-1999, fuel and purchased power costs have skyrocketed and the state's efforts to deregulate the electricity industry have been delayed.

Nevada Power operated under the assumption that deregulation would be in place by March 2003 and negotiated purchased power contracts with the new plant owners guaranteeing 1998 prices through that transition.

But Hay says the company's cost analysis should go beyond March 2003.

"... The company fails to provide a comparison of fuel costs to purchased power costs upon expiration of the (transitional purchased power agreements)," Hay's report says. "To provide meaningful results, the company should, at a minimum, perform a five-year analysis. A most meaningful analysis would compare costs over the life of the generating units.

"Performing a five-year analysis for the period 2001-2005 shows divestiture costs consumers over $900 million in additional fuel and purchased power costs," Hay's report says. "This is attributable, in part, to the favorable fuel contracts the company has entered into, especially for its coal-fired generating units, compared to the costs of purchased power."

Steven Oldham, senior vice president of strategic development for Sierra Pacific Resources Inc., Nevada Power's parent company, concurs that longer-term analysis would provide a more detailed look at the impact of plant divestiture.

But he said, so far, the company has not received permission from the PUC to extend contracts beyond March 2003. A request for that is pending before regulators.

Oldham said the company still may have some disagreements with Hay over how much things will cost in five years.

"It's not a slam-dunk analysis," Oldham said. He explained that purchasing fuel on long-term contracts is a daunting proposition since it's possible that fuel will cost considerably less in the future with the push in the West to develop more wholesale supplies.

Oldham said the company is in touch with industry contacts every day to get the latest information on new supply possibilities, but even with that, price forecasting is difficult in such a volatile market.

He added that load forecasts involving population shifts, the development of new resort properties and the recruitment of new corporations to the area have an impact on how much fuel will be needed to meet demands years from now.

Even the weather has a major impact on fuel purchases, Oldham said, as a cloudy day in the summer can have an impact on whether air conditioners are gobbling up all available power or whether excess supplies can be made available to other markets.