Does public control hold water?

Friday, July 19, 2002 | 3:48 a.m.

WEEKEND EDITION: July 21, 2002

If Las Vegas businessman John Baietti had his way, the Southern Nevada Water Authority would be running the electric company and rates would be 5 cents a kilowatt hour, roughly half what they are today.

The Red Apple Grill owner, a long-standing critic of Nevada Power Co., said he is fed up with having to pay $1,600 a month during the summer for electricity, twice as much as five years ago.

"I don't care if the water authority built a temple or bought everyone a sports-utility vehicle," Baietti said. "I don't care if (General Manager) Pat Mulroy pays herself a million dollars a day. All I want is for my rate to go back to what it was, which was a nickel."

Whether the water authority is even qualified to generate and sell electricity, let alone reduce rates, is the question that needs to be asked now that it is exploring the feasibility of making a "friendly" purchase of Nevada Power.

Opinions on that issue can be divided into at least three camps:

Those who say the water authority would be more accountable to ratepayers, more efficient from a business standpoint and better able to lower rates than Nevada Power.

Those who say state and local governments would lose tax revenue, the books would not be as closely scrutinized as they are by state regulators and an unlevel playing field would be created for potential energy competitors from the private sector.

Those who say the water authority does a good job providing water but remain undecided as to whether it could do the same for electricity.

Provided it is feasible to do so, Mulroy said she sees big advantages to ratepayers if her agency purchased Nevada Power from parent company Sierra Pacific Resources.

"What it brings to the table are all the benefits of public financing and having one master, which is the ratepayer," Mulroy said. "We know there is a solution out there that will dramatically reduce power rates and also be a benefit to the shareholders and to the Nevada economy.

"If we can't lower power rates and provide a benefit to the shareholders, it's not worth doing."

She also said that if Southern Nevada is to have a public power company, it makes sense to have it run by the water authority, which happens to be Nevada Power's biggest customer.

"We've done the most work on it at this point," Mulroy said. "We are the only ones who have a service territory that is analogous. We are in the best position to do this."

Not for sale

Nevada Power's only comment on the subject is that it is not for sale.

But the financially battered Las Vegas utility has seen its footing slip in recent months. Following a state Public Utilities Commission ruling in March that granted the Las Vegas utility only $485 million of the $922 million it sought for energy used last year, Sierra Pacific Resources' value plummeted on the New York Stock Exchange.

Sierra Pacific stock, valued at $1.5 billion in March, has fallen to the $700 million range. Swami Venkataraman, utility analyst for Standard & Poor's, a credit-rating agency, said it would be easier for the water authority to buy Nevada Power on friendly terms than to attempt a hostile takeover, which he said would lead to legal challenges.

"With all the problems Nevada Power is facing maybe it gives them more of an ability to buy this company, whereas they wouldn't have that opportunity if Nevada Power was in good health," Venkataraman said.

Sierra Pacific shareholders are likely to discuss the subject at their annual meeting Monday in Reno, according to Stephen Macklem, a senior trader for Alpart Trading Co. in Chicago, which has invested in Sierra Pacific stock. His response to Nevada Power's claim that it is not for sale: "That pushes the price up."

"For Sierra Pacific common shareholders the sale of Nevada Power would be a good thing," Macklem said. "The stock would rise on that.

"One of the issues Sierra Pacific Resources faces is the cultural difference between (Southern and Northern Nevada). There has been talk of a spinoff of Nevada Power anyway. This would be just another problem for Sierra Pacific that would go away."

The timing of a potential acquisition is important because with bankruptcy still a possibility, there is a chance the value of Nevada Power and its parent will continue to sink. Then again, the value could rise if Nevada Power shows signs it is recuperating financially.

Mulroy said ratepayers most likely would pay for the acquisition through 30-year bonds that would be repaid through their monthly utility bills. But she said she doubts individual ratepayers would feel much of a pinch. The water authority has hired financial adviser Morgan Stanley of New York to develop an offer for the power company.

"They obviously wouldn't be willing to be engaged in this if they didn't think it was financially doable," Mulroy said.

Fair value

The key is to pay fair-market value without paying too much, state Consumer Advocate Timothy Hay said. Nevada Power reported its net assets were valued at $1.092 billion as of March 31.

"You would look at the book value of the assets," Hay said. "If you looked only at the revenues, that would give you skewed value because the northern half (Sierra Pacific Power Co.) has been traditionally stronger than the southern half.

"Much of the debt is at the holding-company level but you've also got debt attributed to both operating entities. Whether potential growth has any additional value to a company that can't cope with current market conditions is an open question."

Even if Sierra Pacific shareholders agree to sell Nevada Power, it is likely the sale would take at least a year to complete because of state and federal regulatory hurdles. That's about the time it took for the 1999 merger of Nevada Power into Sierra Pacific Resources to be approved.

The transaction would have to go before the PUC, Federal Energy Regulatory Commission and possibly the Securities and Exchange Commission. FERC, which regulates Nevada Power's wholesale energy transactions, also oversees its transmission lines because they are used for interstate commerce. The SEC oversees transactions involving publicly traded companies.

The Clark County Commission also agreed to put a nonbinding referendum on the November ballot to let voters decide whether they want a public power company.

PUC Chairman Don Soderberg counts himself among those who are impressed with the way the water authority conducts business, which contrasts his criticism of the parent company's management of Nevada Power. The authority is taking "a very reasoned approach" by conducting a feasibility study, he said.

"I've always been impressed with how the water authority gets its job done," Soderberg said. "We always seem to have water coming out of our faucets. We've seen them deal with such a dire water situation yet they don't even break a sweat."

Another fan of the water authority is Scott Craigie, a former PUC chairman who represented large customers in the Nevada Power rate case. Craigie was chief of staff to then Gov. Bob Miller when the state helped form the authority in the early 1990s to end Southern Nevada's water wars and bring uniformity to the distribution of water among the area's municipalities.

"They've done an excellent job," Craigie said. "They've been very aggressive at acquiring water. Pat Mulroy and her staff have been among the most professional teams of any kind in Southern Nevada. She's very focused and issue-oriented. She saved Southern Nevada from a deep recession (in the early 1990s) and that's a fact. She did it by building alliances with people throughout the Western region who were in the water community."

Fence-sitters

But Soderberg and Craigie also said they don't have enough information to know whether the water authority would be a good electricity provider. Another fence-sitter is Steve Boss, Nevada Energy Buyers Network president, whose clients include resorts and other large electricity customers.

"The whole debate over public power needs to look at a broader picture than just whether the water authority should purchase Nevada Power," Boss said.

"You need to look at future plans and determine whether the water authority would continue to provide power under the current resource plan or build new generation plants that would require significant capital expenditures. The ratepayers would end up paying the cost of that," he said referring to the additional money citizens would have to pay for the plants to be built.

His concerns are echoed by Edison Electric Institute, the Washington trade organization for investor-owned utilities. Vice President Bill Brier said that Nevada Power was hurt by the energy crisis that struck the West in 2000 because of its heavy reliance on wholesale energy at a time when that market was spiraling upward.

Unless the water authority builds more generation plants to reduce Southern Nevada's reliance on the wholesale market, Brier said a sale of Nevada Power to the authority would not reap the benefits proponents believe.

"Acquiring a distribution company doesn't solve the real issue of power supply," Brier said. "What we witnessed throughout the West was that companies that had generation faired far better than those who didn't have enough. The rates of Seattle City Light, a municipal utility, went up 30 (percent) to 40 percent.

"What you would be doing is transferring all the risk from a company and its shareholders to the citizens of Clark County. If there is a shaky wholesale energy market, it can result in a huge price increase."

Mulroy said the water authority is prepared to keep all options open regarding energy policy, and has been exploring the possibility of building generation plants. But she also said the authority would be wise to secure low-cost long-term contracts from other energy providers if available.

"You want to have a diversified portfolio," Mulroy said. "I believe we need to look at investing in renewable energy more than we do now because we live in a desert."

Lower rates

Proponents of public power, including the American Public Power Association in Washington, argue that government-run electric companies have charged lower rates on average than investor-owned utilities since World War II.

"They're nonprofit and their focus is on cost-based service," spokeswoman Deborah Penn said. "They don't tend to have the high salaries you see with privately owned companies."

Hay said one of the water authority's strongest attributes is its "double A" credit rating versus Nevada Power's "junk" status. That distinction means it would be easier for the water authority to borrow money for capital improvements or to purchase energy from wholesalers than Nevada Power, which is forced to pay high premiums. It is one reason why the water authority may be able to charge lower rates for electricity, he said.

"I believe there would be the prospect of a reduction in rates relatively early in the process, possibly 5 percent, but that's purely a guess on my part," Hay said. "Because they aren't credit-worthy Nevada Power is paying a premium for energy. If you look at Nevada Power and how they've invested capital in the past few years, it's certainly not a business model you'd want to replicate."

It is also possible the water authority could save money because of its existing business operations, such as its billing system.

"Because they are currently billing water customers, maybe there could be efficiencies in joining the billing operations of water and electricity as opposed to someone else coming in and duplicating what the water authority already has," Boss said.

Mulroy said she agrees that the water authority could save money through its high credit rating and by combining business functions, such as billing and customer service. And she said that can be accomplished without having to lay off any of Nevada Power's 1,700 employees.

What she can't predict is the amount of time it would take to reduce rates and what those decreases would be.

"It all depends on the final arrangements," Mulroy said. "If it dragged on, a lot of money is wasted in the process."

Tax issues

One of the thorniest issues is taxes. Carole Vilardo, Nevada Taxpayers Association president, is among those concerned with how the water authority would be able to make up taxes that Nevada Power pays to state and local governments.

Nevada Power, which paid $18 million in property taxes to Clark, Lincoln and Nye counties last year, also paid roughly $1.7 million in employee business taxes and an estimated $5 million to $10 million in sales and use taxes, Vilardo said.

Nevada Power is Clark County's fourth-largest taxpayer and is responsible for 7 percent to 8 percent of the general fund budgets in Nye and Lincoln counties, she said.

"That's a substantial amount," Vilardo said. "When you have local governments in this tight economy saying they need more money, can they afford to lose any more? It ultimately falls on the taxpayers."

Although the water authority does not pay federal, property or business taxes, proponents of public utilities argue that they typically make payments to local governments in lieu of taxes. An example would be a rebate of a portion of the electric bill that would be diverted to city halls and schools. Mulroy said she is certain something similar would be negotiated locally.

"It would be irresponsible to make those property taxes disappear," Mulroy said. "We would have to sit down with every recipient and pinpoint how they use those taxes. Some of those taxes are used to fund debt, which disappears over time."

Mulroy also said that local governments, which collected $45 million in franchise fees from Nevada Power last year for access to rights of way, may choose to continue collecting that money from the water authority.

Local control

Another divisive issue has to do with control of power by locally elected officials versus the scrutiny of investor-owned utilities provided by the likes of the PUC. Proponents of public power say it is advantageous to ratepayers to have the freedom to approach locally elected officials with their complaints or suggestions related to electricity.

The water authority, an umbrella organization that represents water and wastewater districts in Southern Nevada, is run by a seven-member board of locally elected officials. Current members are Clark County Commissioners Dario Herrera, Myrna Williams and Mary Kincaid-Chauncey, Las Vegas Mayor Oscar Goodman and city council members Bryan Nix, Amanda Cyphers and Shari Buck of Boulder City, Henderson and North Las Vegas, respectively.

Mulroy said she believes the current board also should have control over electricity initially, although she said it would be possible to form another board to oversee electric service.

"Is that something that shouldn't be publicly debated, such as where we put our power plants and how we go about purchasing renewable energy?" Mulroy said. "My answer is that I hope to see that that happens. That's one of the huge advantages. A corporation keeps its corporate secrets. What has happened to electricity is mystical to most Southern Nevadans.

"Elected officials have constituents who are recipients of the consequences."

Hay also said he sees no problem with having the water authority board control local energy policy.

"The water authority, from a managerial perspective, has run fairly smoothly," he said. "The board has given the managers of the water company considerable latitude to run things."

But Vilardo and Brier said they had reservations. Vilardo said one concern is that a private company that wished to sell an alternative energy source, such as wind technology, might find it tough getting a license from local governments if viewed as a competitor.

"The private company may have to run through hoops that are set up by the local government," Vilardo said. "Do you think there might be an unlevel playing field? I'm cynical enough to think that there would."

Brier also raised doubts about whether the water authority board would have the capacity to scrutinize electricity decisions and set rates as is the case when the PUC examines Nevada Power and other investor-owned utilities. The PUC has a full-time staff of analysts, including economists, whose jobs it is to pore over Nevada Power's financial records, energy purchases and capital investments.

"You saw the huge disallowance they gave to Nevada Power," Brier said of the PUC. "One thing you get with a public agency is the politics of how you allocate costs. They tend to make the residential rates lower than the actual cost of service. There's a lot of political pressure on elected officials and they're concerned about raising residential rates. What you want are rates based on the cost of service to customers."

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