Utility merger at risk

Tuesday, March 6, 2001 | 11:28 a.m.

Nevada's top electric utility executive says that the company's acquisition of an Oregon utility is in jeopardy and that the deal's collapse will cost Nevada ratepayers millions of dollars.

But critics say savings that the merger would bring are minimal and that Sierra Pacific Resources Inc.'s acquisition strategy is empire building on the backs of Nevada ratepayers. Sierra Pacific owns Nevada Power Co., Las Vegas' electric utility.

Walter Higgins, chief executive officer of Reno-based Sierra Pacific, said in an interview last week that he's skeptical that the company's $3.1 billion acquisition of Portland General Electric from Enron Corp., Houston, will be approved by the federal Securities and Exchange Commission.

The SEC is the only regulatory agency that has yet to approve the deal.

Higgins explained that the SEC is directly involved in the Portland General acquisition because Sierra Pacific had to form a holding company under the Public Utilities Holding Act that puts the deal under greater financial scrutiny.

Under rules governing such holding companies, Sierra Pacific is required to file a statement of financial condition with a plan that clearly shows how it would satisfy requirements regarding the capitalization of the acquisition. Sierra Pacific and Nevada regulators had earlier agreed that the SEC would review the company's financial strength (level of capitalization) and only approve the merger if Sierra's financial condition was strong.

Higgins said since the company is in a weakened condition after having lost millions of dollars in fuel and purchased power costs, there's now little chance the SEC will approve the deal with Portland General.

Higgins said even though the Public Utilities Commission of Nevada has approved a $311 million-a-year rate increase to recover fuel and purchased power costs, that money is designated for that and not improving the company's financial stability.

Sierra Pacific was also counting on receiving about $1.9 billion in proceeds from the sale of its power plants, which would bolster its financial position. But even that may be blocked. A bill being debated by the Nevada Legislature this session would prevent Nevada Power and its sister company Sierra Pacific Power Co. from selling their plants until the deregulation of the electricity industry occurs.

Nevada Power and Sierra Pacific were ordered to sell their 10 plants as a condition of their merger in 1999. But now, with market conditions drastically changed, lawmakers are having second thoughts about those sales.

Gov. Kenny Guinn, who is empowered with giving the green light to deregulation or putting it hold, has said he doesn't expect it to start anytime soon.

Higgins said the merged companies were expected to use the proceeds of the plant sales to improve the utilities' infrastructure as the new Sierra Pacific Resources set out to become "the UPS of Nevada electricity." The company contemplated being one of the competitors in the deregulated industry, but changed course when regulators said the company wouldn't be allowed to use its name or logo in advertising the name of the deregulated power affiliate.

While some of the restrictions were lifted, the company bagged its plans to compete for retail customers and instead focused on transmission and distribution of power.

Most utility experts figured Sierra Pacific would invest the proceeds of the power plant sales to new transmission lines. But Higgins said the company set out to stabilize its finances -- and that included the purchase of Portland General, which utility executives said would achieve savings of $60 million to $80 million a year.

The distribution of those savings, Higgins said, would be based on the number of customers served by each utility. Right now, that would mean an approximate split of 59 percent in Nevada to 41 percent in Oregon.

The savings would be achieved, he said, by consolidating redundant departments. That's how the company saves $30 million a year through the Sierra-Nevada Power merger, he said.

"This would be a $4 billion-a-year company," Higgins said. "It would become the 15th largest power company in the United States."

But critics of Sierra Pacific's efforts to acquire Portland General aren't impressed.

"I'm very skeptical that we'd get our fair share of benefits if there are any," said Consumer Advocate Tim Hay, who has led the fight against Sierra Pacific's recent bid to get a 17 percent rate increase.

Hay on Friday voluntarily dropped a suit seeking a temporary restraining order to block the implementation of the new rates that took effect Thursday. He says he'll pursue other legal strategies to stop the utilities from collecting an additional $852,000 a day from ratepayers.

Hay feels it's unfair for Nevada ratepayers to finance the acquisition of an Oregon utility -- especially in a deal in which Sierra Pacific is paying a $1.1 billion premium for "goodwill," an accounting term for intangible value.

Higgins denied that Nevada ratepayers would finance the Portland General deal. He said proceeds from the power plants, much of which were paid for with capital the company raised, would finance the acquisition.

Other events affecting the utility and its operation are occurring at breakneck speed.

* Lawmakers are considering the bill prohibiting the sale of the power plants.

* About 25 companies and organizations are lining up to intervene in the PUC rate case that was approved by commissioners in a unanimous vote last month. The commission allowed the 17 percent rate increase to take effect March 1, but set hearings for later this month to determine if the new rates could be justified. Among the intervenors: the Southern Nevada Water District and the casino and mining industries, the largest users of power in the state.

* The Southern Nevada Water District also is considering selling power through the government entities it provides with water. The district would be able to acquire power from the same sources as the utilities, but it hasn't been determined if or how it would be resold.

Higgins said in some respects, he welcomes action by the Legislature because it would allow the company to make some decisions about its future. The company already operates as a power provider, so there would be no additional expense or logistical problem to keep meeting those responsibilities.

But knowing that the plant sales are off would enable the company to begin negotiating new fuel contracts. The company might also have to brace itself for lawsuits filed by the jilted buyers, who spent millions of dollars in due diligence researching the plants they were planning to buy.

The casino industry hasn't come to a firm conclusion on how the utility issues should be resolved.

Mark Russell, vice president and general counsel for the Mirage hotel-casino, said the large casinos are in the midst of studying the impacts of the sale of the power plants and the new rate increase.

"We have supported the Bureau of Consumer Protection (Hay's office) and others that have chimed in that the timing may not be the best for the sale of the plants," said Russell, who represented casino interests on the governor's Nevada Electric Energy Policy Committee that studied the issues for 2 1/2 months.

"We certainly think there is merit in taking a look at it and seeing if this is the right thing," he said.

Russell said the short-term solution of holding onto the plants looks good now, but he's concerned that when the buy-back deals end in March 2003, ratepayers will lose all the gains they made when prices spike.

Russell said the industry also is studying the most recent rate increase -- which for big users is as high as 27 percent.

"We're going to scrutinize the information because we're not convinced of the necessity of the new increase," he said.

Higgins said he hopes the Legislature would continue to consider the deregulation issue because he said within a few years, there would be enough power supply to make a deregulated system attractive. And, he said, the large companies that are pushing for deregulation have proved themselves to be savvy in utility matters and are ready for it.

As for the water district, Higgins said he doesn't think it makes sense for a board governed by representatives of local municipalities to set utility policy. He said he trusts the staff of the PUC to make informed decisions and recommend public policy, but worries that a utility district could politicize the industry.

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