Energy experts criticize Nevada Power

Thursday, March 7, 2002 | 11:08 a.m.

Two energy consultants accused Nevada Power Co. of creating unnecessary risk by failing to properly analyze its electricity purchases since 1999 and by doing nothing to encourage conservation.

Consultants Carl Pechman of Santa Cruz, Calif., and Gary Dorris of Boulder, Colo., representing the state Bureau of Consumer Protection, told the Public Utilities Commission of Nevada Wednesday that Nevada Power's purchases last year were imprudent.

Their arguments comprise the foundation of the consumer protection bureau's assertion that Nevada Power should be denied its request for $922 million for energy used by Southern Nevadans from March through September. The bureau, a branch of the state attorney general's office, is instead asking the commission for a $950 million reduction.

"They were unable to respond to offers from the market in a timely fashion," Pechman, president of Power Economics Inc., said. "Essentially they operated under the assumption that customers were there for one purpose and that was to bail out the company."

Pechman and Dorris, a principal in Power Economics, argued that Nevada Power's financial problems began to emerge in 1999 after the utility merged into Sierra Pacific Resources of Reno and proposed to buy Portland General Electric from Enron Corp. They testified that Nevada Power executives were so distracted by those events that they did not concentrate properly on the energy the company needed to purchase from other generators from that year forward.

Dorris testified that Nevada Power does not have enough analysts who know how to measure the risk of entering into power agreements or when to purchase such energy. He also suggested that the company needed to do a better job managing its cash flow.

Regarding Nevada Power's exposures to risk, Dorris said that "they're exceedingly large and pose a threat to the company's liability as an enterprise." For instance, he said the company bought too much power too soon in 2001 for use this year, and consequently got stuck with contracts that far exceed current wholesale electricity prices.

"By pursuing an extremely risky and imprudent power procurement strategy, the company has repeatedly rolled the dice on its future value and has repeatedly asked its customers to cover losses from speculative bets that never should have been made," Dorris said in previously filed testimony.

Pechman also argued that Nevada Power could have encouraged its customers to conserve energy to reduce the need for more power from other generators but failed to act. He said utilities did that in California through public service announcements when that state experienced an energy crisis, and the result was a 12 percent drop in electricity demand.

"From what I can tell, Nevada Power did not consider its customers a part of the solution," Pechman said. "There was no effort to manage prices in terms of demand reduction."

Nevada Power attorney William Peterson challenged the consultants' knowledge of Nevada's prior retail electricity deregulation laws. He argued that his company could not enter into long-term contracts in 1999 that would have run through 2001 and beyond in part because there was a chance Nevada Power would no longer have been the provider of last resort.

Under prior state deregulation laws that never went into effect, a provider of last resort would have been the energy company that retail consumers would have had to rely on if no one else would sell them electricity on the open market.

Pechman, however, said he doubted that any company other than Nevada Power would have sought to be the provider of last resort. He said that's because many of those potential customers would have been residential consumers who are not as desirable to energy companies as are large industrial users.

He also said that ratepayers may be better off if Nevada Power went into bankruptcy to reorganize its debts. But Joyce Newman, president of the Utility Shareholders Association of Nevada, said during a recess that would be unfair to Nevada Power shareholders who have already lost hundreds of millions of dollars they will not be able to recoup.

"I'm dismayed that a representative of a state agency would suggest bankruptcy as a reasonable possibility for this company," Newman said. "Other utilities in the region are asking for increases of similar magnitude, so this is not an isolated case. The whole West went through this turmoil."

The Public Utilities Commission staff, which is recommending an $81 million reduction in Nevada Power's deferred energy request, also began testifying on Wednesday. Richard Burdette, the commission's manager of resource and market analysis, said his office only looked at decisions made by Nevada Power from July 2000 forward, which explains why their recommendation for a reduction is far lower than those made by the consumer protection bureau and other critics of the utility.

July 2000 was when Nevada Power entered into a so-called "global settlement" with the state, the consumer protection bureau and many of the utility's largest customers. The agreement amounted to a settlement of lawsuits Nevada Power had filed challenging a 1999 state deregulation law and allowed the company to institute a series of rate hikes.

Burdette expressed concern with the way Nevada Power maintains its records on energy trades and considered other management practices unwise, though he stopped short of calling those practices imprudent.