Critics: Nevada Power-Sierra Pacific merger not working

Friday, June 7, 2002 | 11:15 a.m.

When Nevada Power Co. of Las Vegas merged into Sierra Pacific Resources of Reno in July 1999, the $2.5 billion marriage was viewed as a way to keep the local utility under the control of a Nevada company.

The merger was to have saved ratepayers hundreds of millions of dollars by consolidating business functions while giving shareholders the opportunity to reap the financial rewards that come with serving a rapidly growing marketplace.

Less than three years later, however, critics such as the chairman of the state Public Utilities Commission say the merger has fallen short of expectations.

They say one drawback of the merger has been the inability of Sierra Pacific Resources to tailor energy purchasing strategies to fit the unique needs of consumers on both ends of the state. A related drawback, they say, is that most of the executives left in charge of Nevada Power had been running Sierra Pacific's operations in Northern Nevada and had little experience with energy needs in Southern Nevada.

But PUC Chairman Donald Soderberg and fellow critics also agree that the PUC, which approved the merger, does not have the power to spilt up Sierra Pacific and its subsidiaries, Nevada Power and Sierra Pacific Power Co. of Reno. Although the PUC has the authority to revoke a utility's certificate of operation if it is unable to serve customers, critics say the initiative to break up Sierra Pacific would have to be taken by the company's shareholders and board of directors.

Tough decisions

In an interview last month on "Face to Face with Jon Ralston" on Las Vegas ONE, a partnership of the Las Vegas Sun, Cox Communications and KLAS-TV, Soderberg said that once Sierra Pacific "gets through this summer the board has some very tough decisions to make." Soderberg, who helped approve the merger, said no one realized at the time that Nevada Power would essentially be run by managers in Northern Nevada.

"Does it want to run two electric utilities, which are very, very different?" Soderberg said of the Sierra Pacific board. "A lot of people have felt that not only is the management philosophy from the northern division not appropriate for the southern division but that it is generally too thin.

"If you're going to field an 11-man football team, you have to have 11 starters. You just can't send in the same five starters in and out. Maybe they need to have more depth in upper management. I've come to believe over the last couple of years that that has created more problems than I thought it would."

Sierra Pacific came to the realization that it needed a management shake-up last month, when it was announced that Nevada Power President Mark Ruelle and three vice presidents were out of jobs. One replacement is former Clark County manager Pat Shalmy, Nevada Power's new senior vice president in charge of customer service, government relations and economic development.

In addressing the personnel changes, Sierra Pacific Chairman Walt Higgins conceded that "we lost the confidence of our customers." In Shalmy, who also served as president of the Las Vegas Chamber of Commerce, the utility got a politically connected point man who is deeply familiar with Southern Nevada's issues and power structure.

Even Nevada Power critics such as state Consumer Advocate Timothy Hay said that Shalmy is highly respected and brings to the table extensive public policy expertise. But Hay also said that Shalmy is not familiar with the utility industry and that his hiring alone would not alter the fundamental flaws of the merger.

"I don't think that changes the basic dynamics of what has been a dysfunctional joining of two different utility systems," Hay said.

Although Shalmy has no utility background, Sierra Pacific also hired John Young to be its new senior vice president of energy supply. Young has nearly 20 years of experience in the utility industry and was an executive with Southern Company, the largest wholesale power provider in the southeastern United States.

Nevada Power spokesmen would not comment on the criticism from Soderberg, Hay and other critics about the merger. But Joyce Newman, president of the Utility Shareholders Association of Nevada, defended the company and said she knows of no initiatives by shareholders or board members to split up the corporation.

"The commission had access to an awful lot of information when they approved the merger," Newman said. "I assume they asked all the questions that could be asked. I question why people are looking back now in light of the meltdown in California. It's not fruitful to look back with the benefit of hindsight. The problems at Nevada Power and Sierra Pacific are not due to the merger but due to activities happening outside the state."

Some industry observers suggest that if the Sierra Pacific board agrees to split up the company, possible suitors for its subsidiaries could include in the north Idaho Power and in the south Pinnacle West Capital Corp., the Phoenix holding company for Arizona Public Service Co., or Southern California Edison. Another option suggested by some is to have the Southern Nevada Water Authority take over portions of Nevada Power's operations, including power lines, generating plants or even retailing to customers.

Competitive atmosphere

The marriage between Nevada Power and Sierra Pacific came at a time when other electric companies nationwide had also merged so that they could become more competitive in an atmosphere of electricity deregulation. Sierra Pacific, in fact, made an unsuccessful attempt to acquire Washington Water Power Co. of Spokane before taking over Nevada Power. Industry observers said Nevada Power, which had struggled for decades to keep up with growth, could have been snapped up by an out-of-state utility such as Southern California Edison had it not merged with Sierra Pacific.

Malyn Malquist, then chairman and chief executive officer of Sierra Pacific Resources, made the following statement in April 1998 when the merger was first announced:

"This combination offers us the opportunity to lower costs, increase operating efficiencies and take advantage of economies of scale, providing benefit for both customers and stockholders. More than 1.5 million Nevada and California residents will see benefits from the merger in the form of stable prices and superior customer service."

But critics say that in less than three years since the merger, Sierra Pacific and Nevada Power have failed to deliver on those promises. Prices paid by customers have skyrocketed and there has been a major reshuffling of corporate leadership. Malquist, for instance, is long gone.

And Sierra Pacific has failed to prove that the merger would save as much as $350 million over a 10-year period, as it originally estimated. A company representative testified in a recent Sierra Pacific Power rate case that the merger so far had generated $90 million in savings versus $58.1 million in costs. But those calculations were disputed by the state Bureau of Consumer Protection and by the PUC staff and the issue remains unresolved.

Sierra Pacific's stock, which is sold on the New York Stock Exchange, also has taken a nosedive. The stock, which traded at $37.81 a share the day of the July 28, 1999, merger dropped to $26.19 the following day and never recovered. The stock is now trading in the $6 to $8 range. Quarterly dividends also fell from 34 cents a share before the merger to 25 cents, then 20 cents and now zero.

The company blames its current financial predicament on a March 29 PUC ruling that granted Nevada Power only $485 million of the $922 million it is seeking from ratepayers for energy used last year. But critics charge that Nevada Power, which buys from wholesale suppliers nearly half of the power it distributes to customers, made strategic errors in the way it has purchased that energy since the merger.

Las Vegas attorney Jon Wellinghoff, who was PUC's staff counsel at the time of the merger, said the commission was under "tremendous political pressure" to give its approval.

"I don't think those cost savings have come about and I don't think they have been demonstrated to the PUC," Wellinghoff said. "There is no other reason to do the merger if you don't save money. There's no question Nevada Power should revert back to local control."

Hay said about the only benefit Nevada Power received from the merger was a short-lived boost in its credit rating.

"Basically, it has been a disaster for consumers," Hay said. "Despite the fact you have two different utilities, Sierra Pacific employs the same energy purchasing strategy for both Nevada Power and Sierra Pacific Power. But with its high summer peak demand, Nevada Power has different load characteristics.

"The two subsidiaries also aren't interconnected so that when it's hot in Las Vegas there's no way to get extra power from the northern half."

Different priorities

Assemblyman Doug Bache, D-Las Vegas, who chaired the lower chamber's Select Committee on Energy last year, said the idea behind the merger was that "Sierra Pacific would pick up additional customers and Nevada Power would get additional cash flow. But that has not been the case.

"The merger could have been beneficial but they didn't do anything with the company to make it more beneficial after the merger. I don't think Malquist and (former Nevada Power president Michael) Niggli had a direction to take the company and they're both gone."

Niggli, in fact, had wanted to turn Sierra Pacific Resources into a dominant energy empire by acquiring other companies. But that strategy failed as exemplified by an aborted attempt to purchased Portland General Electric from Enron Corp. for $3.1 billion. The deal collapsed in April 2001.

Critics of Sierra Pacific charged that utility officials spent so much time and brainpower on the Portland General deal that they neglected Nevada Power's need for sound risk management and energy purchasing strategies.

But Bache said he was not ready to blame the merger for the skyrocketing wholesale prices Nevada Power confronted as the result of the Western energy crisis. Bache said it is likely Nevada Power would have faced higher prices anyway.

"If they hadn't merged, each company still would have had to acquire power on the open market," Bache said. "That still would have driven up the rates and caused problems for us."

But Steve Boss, president of the Nevada Energy Buyers Network, said one thing his large commercial clients have noticed about Sierra Pacific has been the company's failure to consult with those businesses on ways to save electricity.

"One of the biggest problems we have had in these rate cases is that most of their witnesses were coming from Reno and weren't as much a part of the Southern Nevada community as we would have liked," Boss said. "We made some very important suggestions to them before the problems started that would have made a tremendous financial difference to ratepayers in Southern Nevada.

"We made suggestions to Nevada Power so that they wouldn't have had to buy as much power as they did. We told them we could turn on our backup generators or turn off some of the large signs. But we weren't listened to as much as we had hoped."

New direction

Boss said he hopes that will change with Shalmy's hiring.

"If Pat Shalmy is authorized to deal with Southern Nevada issues in Southern Nevada, that will be very helpful," Boss said. "I feel he is a person we can talk to.

As a result of the merger, Sierra Pacific's power purchasing division was based in Reno. Nearly half of the energy Nevada Power distributes to its Southern Nevada customers is bought from wholesale suppliers. During the PUC hearings last month involving Nevada Power's $922 million request, critics questioned whether Sierra Pacific had retained sufficient power purchasing expertise to meet the needs of Southern Nevadans, particularly after the Western power crisis struck in 2000.

Soderberg told Ralston that he did not anticipate at the time of the merger that so many of Nevada Power's managers would leave the company and that they would not be replaced by other Southern Nevadans. What was left, he said, was a company whose expertise was primarily in serving a large rural area of Northern Nevada that doesn't have "these great peaks of power purchasing obligations."

"If there is going to continue to be an ability to serve in Southern Nevada, it has to be more designed to meet the needs of this area as opposed to the other area," Soderberg said.

In a separate interview, Soderberg said that Shalmy could help Nevada Power because of his "reputation of being a team builder who brings up younger people through the ranks."

Going forward

Soderberg also said that Nevada Power already does some things well. He praised its day-to-day operations and its ability to respond to sudden problems such as downed power lines. He also said the utility has responded well to population growth.

But he said the utility is deficient in areas such as energy purchasing strategies and risk management.

"On the strategy level clearly they have made mistakes that don't seem to be ones they would have made if they acted in prudence," Soderberg said.

State Sen. Randolph Townsend, R-Reno, chairman of the Senate Commerce and Labor Committee that handles energy legislation, said the merger might have been more successful had California "not screwed up the marketplace."

"The concept of the merger was a great idea given the fact we all wanted to control our own destiny," Townsend said. "We thought the savings would be legitimate. But based on what I know today the shareholders should look at every single option available to them.

"I hope they skip bankruptcy because that's not a viable option. Bankruptcy throws you into an arena where everyone is under the control of the bankruptcy judge. Yes, the lights do stay on but the rate structure is entirely in the hands of the judge."

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