Power company may absorb this year’s costs

Monday, March 11, 2002 | 11:05 a.m.

A Nevada Power Co. spokesman said it remains possible the utility could ask ratepayers for up to $260 million more for energy used this year, but expressed optimism that such costs will be absorbed by the company.

Last week Walt Higgins, chairman and chief executive officer of Nevada Power parent Sierra Pacific Resources of Reno, wrote a memo to business and civic leaders saying that "the likelihood of us filing for an increase in rates next year to cover these costs is nil."

Nevada Power spokesman Paul Heagen said that statement reflected company optimism that it will be able to avoid passing additional costs to ratepayers for energy used this year. But Heagen did not discount the chance that another rate increase could occur based on this year's costs.

"It's always a possibility," Heagen said. "But it would be a last resort. We may file another deferred energy case, but that doesn't mean we will ask for that money either. That's not a decision we're planning right now."

Heagen said Nevada Power's optimism hinges on at least three factors:

Nevada Power, which began buying this year's energy in 2000, has been saddled with contracts for 2002 that are far higher than current wholesale prices for electricity. The company locked in power contracts for this year to guard against the possibility of shortages in wholesale electricity. But after the company bought its contracts through late last year, wholesale prices began a downward spiral.

The $260 million figure is the Public Utility Commission's upper estimate of how much additional energy costs Nevada Power will have to absorb by charging ratepayers $53 per megawatt hour for energy used between April 1 and March 31, 2003. That number is the basis of what customers pay for energy, and it shows up broken down by a rate per kilowatt hour on customers' bills as the "base tariff energy rate."

As part of its $922 million application, Nevada Power wants the base tariff rate to be set at $53 per megawatt hour for the year beginning April 1. A megawatt hour is enough energy to light roughly 1,000 homes for an hour.

Because of Nevada Power's current high-priced contracts, the commission staff believes the company will have to spend up to $260 million more than it will collect from ratepayers if the tariff rate is set at $53. Richard Burdette, the commission's manager of resource and market analysis, said it would have been more realistic for Nevada Power to have sought a tariff rate of about $68 per megawatt hour.

"Otherwise, they'll either have to ask for another rate increase or they'll eat it, and I don't think they want to eat it," Burdette said Friday.

Under state law, Nevada Power can come back to the commission by Dec. 1 to seek money from ratepayers to recover all prudent energy costs that exceed the base tariff rate. That additional money, if granted by the commission, would appear on customer bills next year under another category known as the "deferred energy accounting adjustment."

The deferred energy category is the portion of the electric bill that will go up substantially after April 1 if the commission approves the $922 million request. Because the $922 million request is expected to be spread out over the next three years -- and result in an increase of up to 25 percent in power bills -- it is possible that consumers would have to pay for both the $922 million and the $260 million at the same time.

But Heagen said the company believes it will be able to absorb the $260 million with an assist from state and federal regulators and through deals under negotiation to swap power with other generators.

"We have active deals going on now," Heagen said. "We have a lot of interest from some big people, and we are confident we will reach a workable solution."

Burdette estimated that if the full $922 million request is approved, the result could mean a $2 billion drag on Southern Nevada's economy over the next three years. That's more than enough money to have built two additional Mandalay Bay hotel-casinos.

Burdette, an economist, testified Friday before the commission that passing on the $922 million to ratepayers would cause Southern Nevada's currently slow economic growth to grow even slower.

"The Southern Nevada economy is growing and expanding slowly," Burdette testified. "We see relatively muted employment growth. We've had a reduction in air traffic that is starting to come back."

He said approval of the $922 million request would "prolong the period of low growth and it will discourage employment growth."

"Employers are concerned what it will cost them," Burdette testified. "They don't know what it will cost them. Business hates uncertainty. They are risk-adverse. The risks they see are higher energy prices."

Heagen said Nevada Power is cognizant of the potential hit on the local economy and "shares the concern" of the impact on the public.

"That's why we are pursuing long-term blend and extend," Heagen said of the strategy that includes the power swaps. "We're keeping focused on solutions."