Nevada Power, Sierra deny any shady deals

Tuesday, June 11, 2002 | 11:14 a.m.

Nevada Power Co. and sister utility Sierra Pacific Power Co. of Reno have formally denied participating in certain types of energy trades that are being investigated by the federal government.

In sworn affidavits filed with the Federal Energy Regulatory Commission on May 31 and June 5, Sierra Pacific Resources Chairman Walt Higgins denied that subsidiaries Nevada Power and Sierra Pacific Power have engaged in so-called "wash," "round-trip," or "sell/buyback" trading.

The commission has been investigating utilities in the West to determine whether the high prices consumers paid for electricity in 2000 and 2001 were caused by market manipulation. All major utilities in the West, including Nevada Power and Sierra Pacific Power, have been required to cooperate in the investigation by answering periodic questions about their respective energy trading activities.

Round-trip trading, according to FERC, involves a transaction whereby one company sells energy to another company but makes a simultaneous purchase of that same energy at the same price. Industry observers say FERC is interested in such trades because they have the potential to make it appear as though the companies are doing more trading than is actually occurring. They say that in some cases such trades could artificially inflate the value of those companies and cause wholesale energy prices to rise.

Higgins, who is also president of Nevada Power, said Monday that he could not foresee a circumstance whereby the Las Vegas utility would have benefitted from round-trip trades. He said that's because the utility is primarily a buyer of energy for its customers. The "swap" transactions Nevada Power engages in to sell energy to other buyers are merely for the purpose of reducing the costs of the power it sells to its ratepayers, he said.

However, he said swap transactions, which are commonplace in the electricity industry, are not to be confused with round-trip trades

"The company has not engaged in any round-trip trades," Higgins said. "It would not make any sense for us to do it. We only buy power to satisfy our customers' needs.

"People who make round-trip trades may be trying to build market share to make it look like they're doing a lot of trading. If you do a lot of trading, you'll look bigger because it looks like you're moving a lot of power. Some people in the trading business may be compensated based in part on volume. But the thing that I think is most insidious about round-trip trading is that it could have an affect on the market price."

In the case of Enron Corp., the bankrupt Houston energy giant that has been at the center of allegations involving market manipulation, the company's stock soared on the New York Stock Exchange before plummeting after it was revealed last year that the company did not properly transact all the business it had claimed.

If Nevada Power engaged in any trades to make itself look better, it was not reflected in the price of Sierra Pacific Resources stock. That stock has been on a downward spiral since July 1999, when Nevada Power merged into Sierra Pacific Resources. If anything, critics of the Nevada utilities have charged that their energy traders were not competent enough to prepare for and respond to the Western energy crisis.

"We do not get paid in any way, shape or form based on how much volume we have," Higgins said of Nevada Power's energy trades. "Our traders are not compensated based on how much volume they do. We don't care what our volume is as long as we have enough power to meet the needs of our customers."

Compared to the trading activity of California's large utilities, Sierra Pacific Resources is "small potatoes," Higgins said.

"We are a price taker, not a price maker, so it does us no good to try to create a higher price," he said.

Higgins, in fact, denied a report published over the weekend that suggested Nevada Power had engaged in round-trip trades in November 2000. He said one transaction involved a circumstance whereby the seller could not deliver energy to Nevada Power over the proper power line and therefore agreed to buy it back after admitting it had made an error.

"We could have stuck them, but there's no sense screwing with someone that you deal with everyday just because they made a mistake," Higgins said.

He said other transactions in question involved legitimate swaps in which Nevada Power sold energy through one location known as a trading hub in order to reduce the net cost of higher-priced power that it bought elsewhere.

Nevada Power, for instance, purchases much of its power through the Mead substation in Southern Nevada because of its close proximity to the utility's Las Vegas Valley customers. But energy that moves through that substation is typically purchased at higher prices than elsewhere because fewer trades are transacted through Mead, Higgins said.

In an attempt to lower the prices it pays for energy purchased through Mead, Nevada Power often will sell other energy through the Palo Verde trading hub in Arizona. Because Palo Verde is a major Western hub with far more customers and trades than is true at Mead, energy can be purchased at the Arizona facility at a lower cost. Nevada Power goes out and finds a buyer who will pay a higher price for that energy, and then uses the profits to help defray the higher cost of its power from Mead, Higgins said.

Donald Soderberg, chairman of the state Public Utilities Commission, said that "although wholesale transactions are FERC jurisdictional we will be watching this closely."

State Consumer Advocate Timothy Hay said he plans to investigate Nevada Power's trades to determine whether the utility engaged in round-trip transactions since "concerns have been raised."

"We don't think at this time that there was any improper conduct by the company but we want to make sure that's the case," Hay said.

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