Friday, March 8, 2002 | 10:43 a.m.
In defending Nevada Power Co.'s request for a $922 million rate hike, President Mark Ruelle said the utility was handicapped partly because the state kept changing the way it intended to deregulate the electric market.
Ruelle, as well as other Nevada Power executives and consultants, suggested in rebuttal testimony filed this week with the state Public Utilities Commission that the utility could not have avoided requesting $922 million plus interest from ratepayers for energy used March through September.
Ruelle testified that the company's request "is the result of the state's failed restructuring policy coupled with the single most cataclysmic market disruption in the history of the industry." Disallowance of Nevada Power's request would lead to "financial ruin for this utility," he argued.
The PUC has spent the week hearing arguments in the case. Hearings were expected to end today, but the commission gave lawyers for business and government entities opposed to Nevada Power's request the weekend to review the utility's voluminous rebuttal documents. Rebuttal witnesses will be cross-examined Monday and possibly Tuesday, after which the three-member commission will have until April 1 to render a decision.
The rebuttals, which amount to a summary of Nevada Power's case, state that the utility was victimized not only by uncertainties over deregulation but by the "unforeseen" California energy crisis that struck in May 2000. The utility argues, contrary to its critics, that it could not have locked in low-price long-term contracts from 1999 through last year because the company was uncertain how many customers it still would have.
An example of his criticism of state deregulation efforts and their impact on Nevada Power involved Senate Bill 438, which became law in 1999 but was never implemented. He said the law stipulated that an affiliate of Nevada Power or someone else chosen by the Public Utilities Commission would have been the electricity provider of last resort as of July 2001 for customers who could not buy their power from anyone else on the open market.
Ruelle said that provision alone made it difficult for his company to lock in long-term energy contracts in 1999 that could have meant far lower prices for Southern Nevadans in 2001.
"The commission should be careful not to conclude that service from such (an) affiliate would have been analogous to service from the Nevada Power utility, or that contracts of the Nevada Power utility would somehow have been transferable or assignable to such an affiliate," Ruelle testified. "I personally advised the commission that this structure, which left the PLR (provider of last resort) without any way of establishing the credit necessary to carry out the function, was unworkable."
Jonathan Perry, Nevada Power's principal trader, also defended the company against charges from critics that the utility passed up an opportunity to purchase inexpensive long-term power through Merrill Lynch in late 1999. In rebuttal testimony, Perry characterized the Merrill Lynch deal as a proposal but not an offer to sell.
"We spent considerable time and effort analyzing the Merrill Lynch proposal, but when it came time to fix terms, they kept changing," Perry testified. "The term of the agreement was unsettled. Merrill Lynch had suggested some tax language that had not been agreed upon."
Ruelle also testified that an agreement his company reached with the state in July 2000 that settled Nevada Power litigation against a prior deregulation law while allowing for small incremental rate increases was "obsolete almost before the ink was dry." The reason, he said, was that wholesale prices had begun to skyrocket by then.
"The limited price changes permitted by the settlement were wholly inadequate to address what was then an unprecedented and cataclysmic failure in the wholesale markets," Ruelle testified.
Nevada Power did not attempt to lock in long-term energy contracts in summer 2000 because the company still believed deregulation, which had been delayed by the state, was still a possibility, Ruelle said. To do otherwise would have been "highly speculative and irresponsible," he stated. It was only after Gov. Kenny Guinn announced in October 2000 that deregulation would be indefinitely delayed that Nevada Power aggressively sought long-term contracts.
Ruelle said that left his company in a bind, however, because if market prices calmed and deregulation occurred, Nevada Power would have been left with long-term power contracts it didn't need.
"We were duty-bound to make sure that our customers' needs for continuous reliable power were met," Ruelle testified. "If prices collapsed and customers left the system, the company would have likely collapsed. On the other hand, if we didn't secure supplies early and were thereby unable to secure adequate supply, it was hard to imagine that public policy would have permitted the company to survive in the face of such disastrous consequences to customers and the state's economy."
It turned out that Nevada Power's energy contracts for this year far exceed current wholesale prices, a condition that may force the company to request up to an additional $260 million from ratepayers on Dec. 1. Walt Higgins, chairman and chief executive officer of Nevada Power parent Sierra Pacific Resources of Reno, issued a memo to unnamed business and civic leaders earlier this week denying that such a rate request would occur, even though that possibility was disclosed by Nevada Power executives in testimony this week before the commission. Higgins said the testimony was misconstrued.
The rebuttal testimony from Nevada Power executives was supplemented by statements from consultants who are experts in economics and risk management. They testified that Nevada Power's energy purchasing practices since 1999 and its assessment of risk associated with those contracts were normal for the industry.
Northern California resident Richard Goldberg, a principal of energy consultant The Brattle Group of Cambridge, Mass., said that Nevada Power's energy trading program "compares favorably to its peer group of load-serving utilities."
Peter Fox-Penner, chairman of The Brattle Group, also testified that at least 20 other Western utilities have requested or received double-digit rate increases since 2000.
"It indicates that rate increases of the magnitude (Nevada Power Co.) are requesting are not unique," he testified. "The mere existence or size of these increases is not itself a sign of imprudence or that NPC recklessly bet on the direction of the market ... Simply put, any utility in the Western U.S. that was a net buyer during 2000 -- and there are dozens -- experienced unprecedented cost increases."
Nevada Power gained nearly 10 percent worth of incremental rate increases in 2000 and a 17 percent rate hike in February 2001. If its full $922 million request is approved, consumer bills could go up an additional 25 percent over the next three years.
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