Nevada Power pleads poverty to PUC

Tuesday, March 5, 2002 | 11:21 a.m.

Nevada Power Co.'s future -- and the resulting power bills facing Southern Nevadans -- depends on what the Public Utilities Commission decides to do with the company's $922 million rate hike request.

One scenario expressed Monday by Nevada Power executives could force the utility to seek as much as $260 million more from Southern Nevadans if the company can't negotiate long-term power deals. That would be in addition to the $922 million plus interest that the company is requesting for energy used last year during what officials say was a crisis in the power industry.

Under another scenario, the company believes it can shield ratepayers from further increases for at least the next three to six years beyond its current rate request. That hinges on Nevada Power's ability to swap power with other suppliers while taking advantage of declining wholesale energy prices.

While Nevada Power is laying out a case this week that pleads poverty to the PUC, critics say that the company didn't make wise purchasing decisions and that the PUC shouldn't authorize the rate hike. But the PUC will have the choice of authorizing all or part of the company's request.

What the commission does will decide the future of electric rates in Southern Nevada. The commission, which meets this week at conference rooms at 101 Convention Center Drive, must reach a decision by April 1.

Dennis Schiffel, chief financial officer of Nevada Power parent Sierra Pacific Resources of Reno, and other company executives testified that they made prudent energy-buying decisions based on the California energy crisis and uncertainties over whether Nevada would implement retail electricity deregulation. The energy crisis resulted in skyrocketing wholesale prices from May 2000 through last fall.

"Nothing could have predicted it," Schiffel testified. "That is why we see so many utilities in the Western United States in serious financial difficulty."

But state Consumer Advocate Timothy Hay said during a break in the hearing that the utility may be exaggerating how badly it will be damaged if it does not receive the full $922 million.

"We don't have a clear signal as to if the commission takes off $300 million, whether that could put the company in distress," Hay said. "We probably won't know what the future holds until we have a decision from the commission."

If the commission approves the full amount and an additional $22.9 million request for administrative costs, ratepayers' bills could climb by as much as 25 percent over the next three years.

Steven Oldham, Nevada Power's senior vice president of energy supply, testified that the company's ability to remain credit worthy in the eyes of financiers and other power generators rests on its ability to recover the full $922 million.

"They need to be able to predict they'll be paid back," Oldham testified. "The suppliers will have to be able to calculate how much we will be able to collect in order to do future business with them."

Nevada Power indicated it may be forced to request up to $260 million more from Southern Nevadans on Dec. 1 to pay for energy used this year, an amount Oldham estimated would cost ratepayers an additional 15 percent. That's because the company paid more for energy from other generators for this year than it intended to collect from ratepayers.

Hay said he fears the utility estimate is low and that Southern Nevadans could be asked to cough up another $800 million.

But Oldham said the need for an additional rate hike could be eliminated if Nevada Power retains credit worthiness as of April 1 and is able to swap power with other generators in an effort to mitigate future rate hikes. Nevada Power, for instance, could sell power to another generator in year one of a contract and then buy that power back from the other party at a discount.

In years two and three, Nevada Power would again swap power with the other generator but pay above market prices for that energy to make up for the discount given in year one. On the surface, that would appear to be a loan made by Nevada Power simply to reduce its costs in year one while passing the increased costs to ratepayers in years two and three.

"Based on their track record, I wouldn't count on the company's acumen," Hay said.

Nevada Power spokesman Paul Heagen said the utility believes it could absorb the $260 million it would otherwise seek from ratepayers because the swap contract would lock in lower wholesale prices over the course of the transactions.

"If this works for three years, why wouldn't it work for six years?" Heagen said. "We have a unique opportunity now to purchase low-cost power."

If the commission denies a substantial part of Nevada Power's $922 million request, however, the utility said it could be forced into bankruptcy. Under that scenario, Hay said the bankruptcy court may appoint a special master to oversee future rate hikes or defer to state regulators.

Yet another possibility is that either the utility or its critics would challenge the commission's rate case decision by filing a lawsuit in Clark County District Court. Hay said that under that scenario the rate hikes, if any, would remain in place unless overturned by the court.

It is also possible that local or state government could attempt to take over the utility.

Heagen said, however, that a state law that will allow casinos and other large energy users to buy power on the open market beginning later this year will have no negative impact on remaining Nevada Power customers. He said the departing customers -- including MGM MIRAGE and Station Casinos -- would be charged an exit fee to go on the open market and would continue to pay Nevada Power for use of its power poles and lines.

"The general intent of the legislation was that customers would not share the burden of someone leaving the system," Heagen said.