Power rate increase debate: Utility likely facing lengthy court battle

Friday, March 15, 2002 | 5:10 a.m.

WEEKEND EDITION

The state Public Utilities Commission is in a fix.

After seven days of hearings in Las Vegas that concluded Tuesday, the commission must decide whether to approve or deny Nevada Power Co.'s request for a record $922 million.

No matter how the commission rules, the decision expected on March 29 is certain to be challenged in court.

The stakes are extremely high. If the company gets what it wants, it says it will remain creditworthy in the eyes of lenders, investors and wholesale energy vendors.

It also means customer bills will go up as much as 25 percent over the next three years, a regressive rate hike that would hurt individuals on fixed incomes the most. And the increase will carry over to everyday life in the form of higher restaurant prices, residential and commercial rentals and grocery and dentist bills.

State Consumer Advocate Timothy Hay, whose office is seeking a $950 million reduction rather than a $922 million increase, said he will be left with little choice if the commission favors the utility.

"If the commission gives Nevada Power a substantial amount of money, we will go to district court expeditiously after the commission's decision," Hay said. "We would expect the company to do the same thing if they get less than what they ask for."

If Nevada Power doesn't get what it wants, the company said it may have to file for bankruptcy to reorganize its debts, and may be unable to avoid customer blackouts. It is also possible creditors or government officials could force the company into bankruptcy.

If Nevada Power goes under, possible replacements include large investor-owned companies or a utility run by a state or local government agency.

The three-member Public Utilities Commission, in essence, is merely the trigger mechanism for what promises to be a drawn-out process of litigation that will determine Nevada Power's fate and those of its customers.

Nevada Power has said repeatedly that the company feels the public's pain.

"The goal of the company all along last year was to protect our customers and we did so in the face of clear shifts in public policy and turmoil in the market," Nevada Power spokesman Paul Heagen said. "Our bias has been to err on the side of customers in terms of reliability."

But Richard Burdette, the commission's manager of resource and market analysis, estimated the Southern Nevada economy would take a $2 billion hit over the next three years if Nevada Power's request is granted. That equates to more than half the general fund spending allocated for state government between 2001 and 2003, which is $3.85 billion.

The $922 million alone is equivalent to 70 percent of all gaming taxes that will be paid to the state during this biennium and nearly six times the money collected from business license taxes.

There is also the possibility next year of an additional $260 million rate increase, translating to another 15 percent hike in customer bills, for energy used this year. The company said it could absorb that amount without raising rates provided: its $922 million request is granted, it can swap power with other generators to lower costs, and federal regulators reduce the cost of existing Nevada Power contracts in concert with a federal decision in June to cap electricity prices paid by Californians.

With everything that is on the line, the commission's task is tough for a number of reasons.

Foremost are the wide discrepancies in the amounts of money critics of Nevada Power insist should be deducted from the $922 million request. The deduction requests, ranging from the state Bureau of Consumer Protection's $950 million on the high end to the commission staff's $84.5 million on the low end, prove that there is sharp disagreement over the amount of money they believe ratepayers should have to pay.

The Nevada Coalition of Commercial Energy Consumers, which represents casinos, hospitals and UNLV, is seeking a $506.5 million reduction. Coalition consultant Scott Craigie, former chairman of the commission, said his position is easy to defend.

"We took in adjustments where we felt there was documentable evidence to show that purchases were not properly managed," Craigie said. "We tried to take adjustments where there was clear indication from statutes or documents from inside the company that showed the company violated the law on prudent business practices."

The law Craigie was referring to was Assembly Bill 369, the legislation passed last year that allowed Nevada Power to recoup money from ratepayers for energy purchases as long as the company could prove that its costs were prudently incurred.

The reason for discrepancies in the amounts of deductions sought by critics of the utility has to do with the way events leading up to Nevada Power's $922 million request have been interpreted.

Most critics, for instance, alleged that Nevada Power made poor business decisions since 1999 that must be considered in this case. They said the company was distracted from properly analyzing potential multi-year energy contracts because of its merger that year into Sierra Pacific Resources of Reno and its plans to acquire Portland General Electric from Enron Corp.

Some critics alleged that Nevada Power was simply incapable of analyzing business risk because the company didn't have the right people to perform those tasks. Nevada Power defended its risk management team as being on par with industry standards, but during breaks in the hearings critics muttered that the company was "incompetent."

"Jim Joyce, the risk management consultant they hired for $40,000 a month, had to provide a computer program in assisting the company to manage risk in the power markets but the computer program was never functional," Hay said. "It was clear that they were not able to analyze the risk they were exposing their customers and shareholders to."

Critics blamed Nevada Power for failing to reach a deal with Merrill Lynch in fall 1999 that could have secured power at $33.75 per megawatt hour for 2001, or roughly one-fifth of what the utility wound up paying on average last year. The utility, which refused to pay more than $33.50, testified that it thought it could buy power more cheaply at that time.

"That transaction alone, had they consummated it, would have saved ratepayers hundreds of millions of dollars," Hay said.

Commission staffers believe only events since July 2000 should be considered. That was when a "global settlement" involving the commission, utility, state Bureau of Consumer Protection and large electricity users was reached. The deal kept possible deregulation alive but allowed Nevada Power to receive incremental rate increases from customers.

The company believes the case dates back only to fall 2000, because that is when the utility began purchasing energy for the March through September period last year that is the subject of its $922 million request.

"If you go back further than that, you are dealing with a completely different policy environment and a completely different market," Heagen said. "It's almost irrelevant."

Nevada Power has portrayed itself as the victim of a power crisis that swept the West in 2000, when California's experiment with deregulation collapsed. Beset by blackouts and cash-poor utilities, Californians accused power generators of withholding supply to drive up electricity prices. Dominant wholesale vendors such as fallen energy giant Enron -- which sold $504 million in contracts to Nevada Power from October 2000 to September 2001 -- have also been accused of market manipulation.

Prices for natural gas, used to fuel many of the generating plants in the West, spiked to record highs. Also, the Pacific Northwest was hit with a drought that severely reduced available hydropower.

Nevada Power, which generates roughly half of its own electricity, said it was forced to pay high prices for energy from other generators because of the crisis. The company said many other Western utilities were in the same boat and also had to pass on double-digit rate increases to consumers.

"It was really important for everyone to go back in a time machine and understand what was going on a year ago," Heagen said. "It was important to go back to appreciate what we really faced. We believed our first obligation was to have power at a time when everything was in turmoil. It's almost that simple. This is not an easy business." But Hay said that had the company acted prudently in 1999 by securing long-term contracts, it could have "insulated us from the whole power crisis."

Nevada Power defended the purchases it made for energy last year, arguing that it was forced to pay high prices through early 2001 to ensure that Southern Nevada would have enough electricity to keep the lights on last summer. That purchasing strategy hinged on the fear that California's prolonged crisis was going to cause shortages of electricity throughout the West.

The utility points to a California Energy Commission report that recorded 23 days of rotating blackouts in that state in January and February 2001, with outages continuing through May.

"We wanted to make clear that we sought an accelerated strategy that clearly recognized the growing crisis in California," Heagen said of Nevada Power's energy purchases. "We had a real concern about our ability to even acquire power for the summer."

Wholesale prices began declining last year, however, leaving Nevada Power with contracts covering this year that remain well above current market prices of about $40 per megawatt hour. (A megawatt hour is enough energy to light roughly 1,000 homes for an hour.)

The sharp differences between Nevada Power and its critics, and even among the critics themselves, make it obvious that many people will be unhappy with the commission's ruling. And those people will take their dispute to district court, either in Clark County or Carson City.

Which way the commission goes is anybody's guess.

"The commission is very hard to read," Craigie said. "They did a very good job of getting all the information on the table without showing us which way they are going.""

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