Editorial: The devil is in the details

Friday, Aug. 23, 2002 | 4:07 a.m.

WEEKEND EDITION: August 25, 2002

The Southern Nevada Water Authority's initial offer last week of $3.2 billion to buy Nevada Power seems reasonable at first glance -- especially since the water authority says electricity rates could be reduced 20 percent if the government agency ran the electric company. And while Sierra Pacific Resources, Nevada Power's parent company, said that it isn't for sale, Sierra Pacific executives said they would carefully consider the offer.

Despite the seemingly promising bid, the devil is in the details, and there are many questions that must be answered and concerns addressed as the water authority begins its acquisition bid. For starters, the water authority will have to look at Nevada Power's books more extensively to see if it should revise its bid -- a belated discovery of "surprises" in the ledgers isn't an option with such a huge outlay of taxpayer money.

As the negotiations get under way, Sierra Pacific will look at the $3.2 billion offer as a starting point. And if Sierra Pacific wants to unload Nevada Power, its executives naturally will try to up the purchase price by being less than accommodating to the water authority's offer. It will be critical to keep in check the egos of the water authority's board and staff so that they don't end up paying too much for the utility. Although it's unlikely a private corporation would make a competing bid for Nevada Power, it could happen, which could drive up the asking price even more, a possibility that very well could doom a deal with the water authority.

The water authority also must make a compelling case that it can efficiently run an electric company, a business that is an extraordinarily difficult operation to undertake. Electricity reliability is critical, more so in the desert during the summer, and making sure that the lights stay on isn't as simple as flipping a switch down at Nevada Power's offices on Sahara Avenue. In addition, right now the water company is a well-run operation that is respected in Southern Nevada. What we wouldn't want to see is the water authority become just an average water utility because it is distracted by taking over what is a troubled electric company.

What also could have a huge impact on future electricity rates -- if the water authority ends up buying Nevada Power -- is the water authority's long-term energy strategy. Will it decide to concentrate on buying power in the wholesale market? Doing so when energy is abundant means low prices for the utility and its customers, but at the same time, as the energy crisis that struck the West in 2000 brought home, if there isn't enough power available and demand is high, customers can be hammered by high electricity costs. (Of course the recent "energy shortage," as we subsequently found out, was due in part to market manipulation by energy giants such as Enron.)

Conversely, putting a premium on building more power plants requires quite an outlay of money and can mean higher rates when energy is plentiful, but it also creates more reliability and insulation from getting taken advantage of by electricity wholesalers. During the energy crisis when everyone else was being gouged by wholesalers, the Los Angeles Department of Water & Power, a government-run utility, weathered the storm because they had such an abundance of their own power plants. An electric company could also have a mixture of both, keeping some plants but also buying on the wholesale market. What horse you hitch your wagon to can make all the difference between customers paying reasonable rates vs. the skyrocketing rates we've had to pay in the past few years.

As we've noted in a previous editorial, a buyout is intriguing, and we support the water authority's exploration of purchasing Nevada Power. But it is a bid that should continue to be done thoughtfully and with great care considering the enormity of the stakes involved.

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