Power of ownership: Rate decision leaves critics calling for public utility

Friday, March 29, 2002 | 5:24 a.m.

WEEKEND EDITION

In the wake of a state ruling that significantly reduced the amount of money Nevada Power Co. could recoup for energy used last year, the utility faces an uncertain future.

That uncertainty was made manifest on Friday when the state Public Utilities Commission approved only $485 million of the $922 million Nevada Power was seeking.

The utility won't yet say whether it is headed to bankruptcy court, whether it will challenge the ruling in district court or whether it will take some other action.

What the utility has continued to do, however, is to cry poverty and argue that it deserves to recover the $922 million it had to pay for energy because of a power crisis in the West.

But critics such as the state Bureau of Consumer Protection and MGM MIRAGE say Nevada Power made poor business decisions. They assail the investor-owned utility for being greedy at a time when Southern Nevada's tourism-based economy was still reeling from the Sept. 11 terrorist attacks.

That prompts two questions: Should Nevada Power stay in business? If it were to be replaced, what would replace it?

The answer to the first question would have been a resounding "no" had one conducted a poll at town hall meetings held earlier this year by the PUC. Ratepayers in attendance said they were already fed up with 26.6 percent worth of electricity rate hikes from summer 2000 through early last year.

The answer to the second question, as suggested by some in attendance: let Nevada Power dissolve and allow local government to take over electricity. Since 2,000 communities in the United States are served by public power, why not the Las Vegas Valley?

Pat Mulroy, general manager of the Southern Nevada Water Authority, was one of the first community leaders to raise that issue. In January 2001 she proposed a public-private partnership in which a local agency such as the water authority would sell retail electricity but would hire private companies to operate the system and build the power plants. Mulroy said that ratepayers, rather than investors looking to make a profit, would be in control.

"I still think it's an option that needs to be explored," Mulroy said. "The public sector doesn't have to make a profit. That's been part of the issue as to whether power plants get built. When we build facilities we look at building for the long term and let the community grow into the facility. The public sector has only one master and that's the end customer."

Nevada Power spokesman Paul Heagen said that while government-run utilities have their place, investor-owned utilities can better serve large areas that cover multiple political jurisdictions, as in the valley.

"Public utilities tend not to work as well in areas where they have to cross municipal boundaries," Heagen said. "You lose all economies of scale as opposed to an investor-owned utility that can operate well outside the boundaries of municipalities.

"Investor-owned utilities serve the most competitive markets in the United States. Most public utilities serve smaller municipalities and rural areas."

It is possible for public power companies to operate in large metropolitan areas, however. Los Angeles, Sacramento and Seattle are notable examples. State Consumer Advocate Timothy Hay also said it would be possible to form a public power authority that could serve the entire valley without worrying about political subdivisions.

"It would not be much different than the Southern Nevada Water Authority, which serves a number of communities here," Hay said.

But the Edison Electric Institute, the Washington trade association for investor-owned utilities, doesn't believe government-run utilities are all that they're cracked up to be.

"We always say that privately held, competitively run companies are better because they allocate capital more efficiently than does the public sector," institute spokesman Jim Owen said. "They also stimulate the innovations that the market needs."

Nevada already has eight publicly owned power utilities but they serve only small communities such as Boulder City, Caliente, Fallon and Overton and reach only 2.4 percent of the residential units in the state. That's well below the national average of 14.5 percent.

The advantages of public utilities are many, according to their proponents. Such utilities can afford to charge lower rates on average than is true of investor-owned companies such as Nevada Power parent Sierra Pacific Resources because they don't pay local or federal taxes.

In 2000, the latest figures available, Nevada's public utility rates on average were far lower than those charged by Nevada's investor-owned utilities, according to the American Public Power Association in Washington. That was true of residential customers (4.9 cents per kilowatt hour versus 7.4 cents), commercial users (5 cents per kilowatt hour versus 6.9 cents) and industrial consumers (1.6 cents per kilowatt hour versus 5.3 cents).

"Because public utilities are nonprofit the revenues stay in the community," association spokeswoman Deborah Penn said. "With local control your rates and policies are set locally and there is accountability. With investor-owned utilities it's hard to know where accountability lies."

As tax-exempt, nonprofit entities, public utilities can borrow money at lower rates than investor-owned utilities can. They also get preference on federally produced hydropower such as at Hoover Dam. And instead of paying dividends and answering to shareholders, public utilities exist at the behest of ratepayers and are usually controlled by city councils or citizen commissions.

"The biggest hurdle in forming a public utility would be litigation from the privately owned utility," Penn said. "They don't want to lose a lucrative customer base."

Heagen said perceptions that utilities are hugely profitable can be misleading, however. He said typical investor-owned utilities make profits of only 5 to 6 percent annually. But while public utilities may offer lower rates, Heagen said investor-owned utilities can better allocate money for power plants, transmission lines and other system upgrades.

He said that city-owned power utilities, for instance, must compete for capital with other departments such as those dealing with law enforcement and street maintenance. Likewise, he said, a public power function operated by the water authority would have to compete for capital with water system needs.

"When it comes to getting the best job done it's almost always better off in the hands of the private sector," Heagen said. "We don't have competing interests as does a public utility. We're not competing against the street department or the police department or the water department."

Still, the idea of switching to public power is taking hold in California, a state that botched retail electricity deregulation. More than 20 cities in that state have given serious thought to running their own electricity departments, according to the League of California Cities.

"When the energy crisis hit full bore last year, including the blackouts, there were a lot of cities looking at public power because they wanted to take control of their power supplies," Yvonne Hunter, the league's legislative representative, said. "There are still a number of cities interested in it, but whether they move ahead is another question. There are legal issues and it could be very expensive."

Faced last year with the threat of losing manufacturers because of rising electricity prices, the city of Corona, Calif., became first in that state to form a municipal utility as a result of the power crisis. The decision by the city, which has 140,000 residents, has saved business customers at least 10 percent on power bills.

"We find we can do it cheaper," George Hanson, Corona's power utilities manager, said. "We find the local control aspect is beneficial as well. Instead of going to the California Public Utilities Commission to raise your complaints you can go to City Hall."

The Los Angeles Department of Water and Power, the nation's largest public utility, was able to survive California's energy crisis without raising rates. In fact, the city utility has not raised rates since 1992.

Los Angeles water and power spokesman Eric Tharp said the city utility was able to survive the power crisis because of the way California's deregulation law was written. The city, for instance, was able to maintain its own power generation plants and its monopoly on customers. With guaranteed electricity and customers, the city utility was insulated from the power shortages and skyrocketing wholesale energy prices that struck investor-owned utilities.

"The key advantage is that we work for the community, not the shareholders," Tharp said. "We've made a number of cost reductions. We've sold off a lot of excess property and we reduced our staff. We've also been able to sell excess power to pay down debt."

But supporters of investor-owned utilities say an advantage of companies such as Nevada Power is that they invest in the communities they serve. In a report on its Internet website, Nevada Power stated that its employees performed 9,000 hours of volunteer work in 1999 and that the company and its affiliated Sierra Pacific Foundation donated $898,000 to charities that year.

Joyce Newman, president of the Utility Shareholders Association of Nevada, argued that companies such as Nevada Power are actually more accountable than public utilities because they are thoroughly examined in hearings conducted by regulators such as the PUC.

"If a utility was municipally owned, we wouldn't have these hearings," Newman said. "They would just take the proposed rate increase to the board and vote it up or down. During these hearings everything was on the table to look at."

Heagen agreed, adding that Nevada Power and parent Sierra Pacific Resources must answer to the Securities and Exchange Commission and the Federal Energy Regulatory Commission as well as to the PUC.

"We have more scrutiny than a municipal utility," he said.

There have been instances, however, when the PUC approved rate hikes without conducting hearings. Hay said the most notable example occurred early last year, when the commission gave Nevada Power a 17 percent rate hike worth $311 million.

"At the time that was the largest rate increase in state history and it was implemented under what we thought were flimsy arguments," Hay said. "We tried to get a restraining order to keep the rates from going into effect but we didn't succeed."

Newman said another advantage of investor-owned utilities is that their taxes help support local government. It so happened that before the spate of megaresorts on the Strip, Nevada Power was the largest property taxpayer in Clark County. This fiscal year, they rank fourth in property taxes behind MGM MIRAGE, Mandalay Resort Group and Park Place Entertainment, the three largest companies on the Strip.

With $1.96 billion worth of taxable property, Nevada Power has paid $20.6 million this fiscal year in property taxes, according to the Clark County assessor's office.

"If this utility went from private ownership to public ownership, who would make up the taxes?" Newman said.

It could be argued, however, that the $922 million sought by Nevada Power was the equivalent of a major tax increase. That amount is equal to 39 percent of Clark County's $2.35 billion budget this year and almost as much as the combined municipal budgets of Las Vegas ($740.6 million) and Henderson ($297.8 million).

It is only slightly below the $936.2 million in revenues reported by the Bellagio last year and well above the revenues of most other Strip resorts.

Still, Owen argued that trends in the United States and Europe indicate that "things are being privatized all over."

"They're looking at privatizing electric utilities and railroads in Europe," he said.

When Mulroy proposed the public-private partnership it was as a member of Gov. Kenny Guinn's Energy Policy Committee. The idea was hatched while Nevada Power was proposing further rate hikes tied to its rising energy costs. That the idea came from the water authority was not surprising since it is Nevada Power's top customer.

The concept never was adopted, however. Instead, the Nevada Legislature last year passed Senate Bill 425, which prohibits local governments from selling retail electricity to consumers without permission of the power companies that are already serving those customers.

The bill was part of a legislative strategy supported by Guinn to help existing power companies such as Nevada Power retain as many customers as possible. The strategy represented a turnaround for state lawmakers who had previously supported total deregulation of retail electricity. What changed their minds were the deregulation failures in California.

Mulroy said the Legislature would have to repeal SB425 in order for a public agency such as the water authority to provide retail electricity for valley consumers. She said she would not rule out the possibility that the water authority would push for that law to be repealed by the 2003 Legislature.

"Energy is starting to lose its characteristic as a commodity because people can't choose not to buy it," Mulroy said. "It's part of the community infrastructure."

Heagen argued that Nevada Power wants to work with the water authority to improve Southern Nevada's utility infrastructure. But he added that the company is better suited to continue being the electricity provider because of its experience and industry contacts.

"I don't think the last two years should be the basis to believe that there's an easier way to do this," Heagen said of providing electricity. "Investor-owned utilities have been doing a good job in Nevada for decades."

The chorus of proponents favoring a government-run power utility in Southern Nevada grew louder earlier this year at four local public hearings conducted by the PUC. The commission heard many residents complain that they didn't care if the utility went bankrupt.

That attitude toward the utility upset its executives, including Walt Higgins, chairman and chief executive officer of Sierra Pacific Resources. Higgins told the Las Vegas Sun editorial board in February that bankruptcy could lead to local blackouts.

"The problem is that bankruptcy is not pretty," Higgins said then. "It has short-term consequences on the customers."

One consequence, he said, could be a raid on the state treasury. That's what happened in California, which had to spend $12 billion in taxpayer revenue to keep the lights on and committed an additional $43 billion for power contracts.

Higgins said bankruptcy could lead to rolling blackouts in the valley once existing power supplies were exhausted. That's because the company would no longer be creditworthy in the eyes of Wall Street financiers and thus would not have the financial backing to purchase any more energy from outside generators, he said. However, he declined to speculate on how quickly blackouts would occur if the company declared bankruptcy.

Critics of Nevada Power stated, however, that residents of California, Texas and New Hampshire were still able to get electricity even when investor-owned utilities in those states went bankrupt. Hay, for one, scoffed at the notion that a Nevada Power bankruptcy would lead to blackouts.

"There has never been a utility bankruptcy in the country that has resulted in blackouts for financial reasons," Hay said. "It has never happened and there is no reason it would happen here.

"For one thing, the rates we have now are high enough that Nevada Power could pay cash for electricity on the open market. The credit risk is also reduced once they're in bankruptcy because the bankruptcy court would act as a trustee and would pay the bills."

At least one lawmaker, State Sen. Joe Neal, D-North Las Vegas, said he intends to introduce a bill next year that would allow Southern Nevadans to have a government-run power company.

"I'll follow through on what I think even if no one else will support it," Neal said. "When you make the argument that many utilities that are publicly owned have not faced the rate increases we've faced, that's a good argument for public power."

Another option favored by Assemblyman Roy Neighbors, D-Tonopah, is for Nevada's communities to be able to purchase power on the open market through a process known as aggregation. Under that process, a city would be able to buy power for all of its residents on the theory that such bulk purchases would save ratepayers money in the long run.

A bill Neighbors sponsored to approve aggregation died in the Assembly in 2001 but he said he plans to reintroduce the legislation next year. A similar bill supported by the League of California Cities is under consideration by that state's legislature.

"It has been very successful in other states," Neighbors said. "I was always opposed to deregulation because most of the states around us had power bills that were higher than ours and we were trying to fix something that wasn't broke. But I would definitely introduce my bill again because it's a tool people can use."

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