Rate hike would squeeze local economy

Friday, Feb. 8, 2002 | 5:26 a.m.

At the Koala Motel & Apartments, where occupancy has plummeted because of street closures downtown, the likelihood of another energy rate hike may push Juanita Wilson's business over the edge.

Wilson's motel at 520 S. Casino Center Blvd. has already seen occupancy drop from 70 percent to 35 percent because of street closures caused by construction of the Regional Justice Center. That is why the prospect of a 25 percent rate hike from Nevada Power Co., following a similar increase a year ago, is more than Wilson is willing to bear.

"I'm terribly upset," Wilson said. "I already have to charge less to draw people here. We can't pass on these astronomical rates to clients. There's no way I can pass them on because I wouldn't get any more clients."

Nevada Power is attempting to recoup $922 million for energy already used by Southern Nevadans and an additional $22.9 million for administrative costs. But those proposed rate hikes would affect consumers far beyond their monthly residential bills.

At restaurants, doctor's offices, commercial properties and government agencies throughout the Las Vegas Valley, the pile-on effect of a rate hike merely adds to the misery of having to operate in a soft economy.

Some businesses will pass the higher energy costs to consumers in the form of increased prices or rent. Bob Ansara, owner of the Ricardo's Mexican restaurants in Las Vegas, said he is being forced to consider a 5 percent hike in menu prices this year largely because of his higher energy bills.

"We've already been hit by energy bills that were up 33 to 35 percent in the previous year," Ansara said. "Five percent would not be a huge increase because we're moderately priced. But it will hurt the independents the most, the mom and pop pizza shops and coffee shops, where a 25-cent or 50-cent increase may be the difference between someone eating out or bringing a bag lunch from home."

Other businesses will be forced to absorb the proposed rate increase, reducing their ability to purchase new equipment or give pay raises to employees because of shrinking profits. Many local physicians will fall into that category because the rates they charge patients are already set by Medicare and insurance contracts.

Something must give

Dr. Marietta Nelson, a Las Vegas ophthalmologist, fears that Valley Hospital Medical Center will raise the rent on her office when her current lease expires. Yet she would not be able to pass that cost to patients, meaning something else will have to give.

"You either have to see more patients or your income drops," Nelson said. "But I can't increase my patient volume much because the quality of care will suffer."

There are those who are taking a wait-and-see approach. MGM MIRAGE is preparing to testify in the ongoing Nevada Power rate cases before the Public Utilities Commission of Nevada but has not determined whether it will pass rising energy costs to consumers. Starbucks Coffee Co. of Seattle also is sitting on the sidelines.

"Starbucks Coffee Co. has not had a price increase since August 2000, and currently there are no price increases being discussed," company spokeswoman Lara Wyss said. "We cannot speculate on the impact, if any, a proposed electricity rate increase would have on our business in Southern Nevada."

One reason this particular rate hike would represent a drain on the local economy is that Nevada Power spent the $922 million on energy from generators in other states. That means money left Southern Nevada and went to the states that generated that spare power, Keith Schwer, director of UNLV's Center for Business and Economic Research, said.

He said an example of a similar economic drain was suffered by New England in the 1970s, when that region was particularly hard hit by skyrocketing heating oil prices, with the oil having been produced in Texas and elsewhere.

"It sets in motion a whole set of price changes throughout the economy," Schwer said. "It affects expenditures, income and employment."

Van Heffner, president and chief executive officer of the Nevada Hotel & Lodging Association, agreed that rising power bills would have a snowball effect on the local economy.

"Maybe Nevada Power should do some cost cutting itself or lay people off," Heffner said.

Snowball effect

Schwer said large businesses with little competition may have no problem passing higher energy costs to consumers. But he said businesses that face stiff competition, such as restaurants, may be less prone to raise prices because to do so could drive customers to other eateries.

When it comes to his rental and other commercial properties in the valley, Paul Kellogg said the ability to pass on rising energy costs to tenants depends on the nature of the lease agreements. With some properties, utility costs are included in the rent. In other cases, the tenant must pay any extra over a certain amount that is specified in the lease.

But Kellogg, who saw his power bills climb 30 to 35 percent last year, said it is "unthinkable" to pass all energy costs to tenants, especially when Southern Nevada's soft economy has stiffened competition for new customers.

"Obviously, if there are significant rises in power rates it severely handicaps the property that you're trying to make work," he said. "If you keep your rates low to get more tenants, but you're met with higher utility costs, it's like french-kissing a rattlesnake."

For many area physicians, the possibility of another Nevada Power rate hike pales in comparison to far more costly developments, including skyrocketing malpractice insurance premiums and cuts in Medicare reimbursements. Among those who feel that way is Dr. David Steinberg, a Las Vegas radiologist who relies heavily on energy-consuming medical equipment.

"If my power went up 50 percent and I could still buy malpractice insurance, I'd be the happiest guy in the world," Steinberg said. "I already got a 15 percent pay cut from Medicare this year and I'm going to get a 200 percent to 400 percent increase in malpractice insurance -- if I can get it. The power thing is a non-issue."

Mitigating costs

To lessen the impact of rising power bills, Las Vegas dentist Dr. Dwyte Brooks said he has taken many energy conservation measures in his office. He has double-paned windows, his lights are dimmer in non-treatment areas and he uses battery-powered lights wherever possible.

Yet his monthly electricity bills have shot up from $1,000 to $1,500 within the past three years. Brooks is figuring on another $100 to $500 a month more if Nevada Power's rate hike requests are approved.

Electricity represents only 1 percent to 2 percent of his overhead but, unlike physicians, it's a cost he can more easily pass on to patients. That's because Brooks said he and most other local dentists serve far fewer patients under fixed rate insurance plans than do physicians.

"It'll probably mean that for a $500 procedure, you're looking at an additional charge of $5 to $10," Brooks said of patients' bills. "It's something that gets passed on because we don't have a choice."

Among retailers, grocers will be particularly hard hit and will also have to pass higher energy costs to consumers, Mary Lau, executive director of the Retail Association of Nevada, said. Lau said the price hikes most likely would be applied to high-volume groceries -- where there is margin for such increases -- but not on essential items such as bread and baby food.

"Grocers are huge energy users," Lau said. "They're 24/7 operations and they have extensive cooling and freezing units."

Many area hotels added a $3 surcharge to room rates last year to make up for higher energy bills, Heffner said. Whether there will be an additional surcharge this year remains unknown.

"Some hotels book rooms months or years out so they had no choice but to add an energy room charge because their room rates were fixed," he said.

City also suffers

Like area businesses, local government also must cope with rising energy costs. The city of Las Vegas is anticipating that its power bills, which were more than $8 million last year, could climb over the $10 million mark this year. City spokesman Erik Pappa said it is not yet known how that might impact municipal services or projects.

The city has taken energy conservation steps, however. This has included more energy-efficient lighting for city offices, community centers and traffic signals, and improved control of thermostats. The city even has offices where the lights go off when nobody is present, thanks to motion sensors.

McCarran International Airport, which is operated by Clark County, also anticipates a $2.25 million power bill hike if the Nevada Power requests are approved, despite its having taken many energy conservation measures. Such measures, including more efficient lighting, chillers and fan motors, have saved enough energy over the past 10 years to have powered 372 homes in the valley.

Airport spokeswoman Hilarie Grey said McCarran expects to absorb higher energy costs through revenue it generates from concessionaires, slot machines, parking and advertising. Increased power bills simply would cut into those profits without affecting airport operations, she said.

"Our first goal is to keep airline rates stable," Grey said.

The county itself is looking at spending at least $2.75 million more for electricity this year. County finance director George Stevens said those costs might be absorbed by any growth in revenue. But if revenue growth is flat, he said the money to pay higher energy bills may have to come out of budgets intended for capital expenditures such as new buildings or equipment.

"If you can't keep up with growth in a high-growth area by increasing your personnel or technology, your service levels will decline and waiting lines will be longer," Stevens said.

Stevens said the damage would not end there, however. Because consumers and businesses would be dipping into discretionary income to pay higher energy bills, he said that is money that will be diverted from potential sales tax revenue.

"We see the same problem whenever fuel prices go up," Stevens said. "Because 600 million gallons of gasoline are purchased in Clark County each year, whenever gas goes up 50 cents that costs us $300 million."

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