Friday, Oct. 4, 2002 | 5:32 a.m.
By Pat Mulroy
Pat Mulroy is general manager of the Southern Nevada Water Authority.
There are many examples of well-run utilities across the country, both publicly owned and investor owned. The question for Southern Nevada is not whether one approach is intrinsically better than the other, but which one will resolve the issues this community faces to assure a stable, reliable and affordable power system. The Southern Nevada Water Authority's offer to buy Nevada Power presents an alternative that will benefit ratepayers, our economy, the company and our quality of life as a community.
The SNWA recently affirmed its offer to buy Nevada Power for $3.2 billion from its owner, Sierra Pacific Resources. In that offer, we make it clear that rates will be cut immediately by 20 percent upon completion of a sale. Residents and businesses will save at least $2 billion during the first 10 years. At the same time, this offer represents a share value to the investors of $12 for each share of stock. Today the company is trading at around $6.
Selling Nevada Power assets to SNWA makes financial sense. For months, SNWA and its financial and legal advisers have closely studied all publicly available information about the power company. By refinancing the company's expensive debt structure, ratepayers will save literally hundreds of millions of dollars each year.
Nevada Power has very poor credit. It pays a steep price on its business debt and the higher costs are passed to customers. Conversely, SNWA has outstanding credit. It can replace the power company's expensive debt and its return on equity at much lower rates and pass the savings on to ratepayers.
In addition, the SNWA would not have to pay the federal government at least $60 million each year in corporate income taxes. SNWA's credit rating will also allow it to acquire long-term energy supplies and to construct much-needed new infrastructure at lower cost, providing additional substantial savings to ratepayers.
Refinancing is the key. Nevada Power has about $2 billion in debt. The interest on this debt costs ratepayers an average of 7 percent or more each year. In addition, the company is guaranteed a 10 percent return on more than $1 billion in shareholder equity. If you are a Nevada Power customer, you pay for this now. Allowing SNWA to buy out the debt and equity with low interest bonds effectively adds no new debt, but will drastically cut costs to ratepayers and reduce their power bills immediately. It is the same concept as refinancing a house. If your home loan was issued at 10 percent and you refinance it later at 5 percent, you've saved money.
There will be no effect to state and local governments from an SNWA purchase of Nevada Power. We will use agreements or in-lieu payments to maintain any property taxes and franchise fees. Most importantly, state and local agencies will save millions of dollars on their own power bills -- savings that can be used for other priorities or passed along to residents in the form of reduced costs.
The SNWA management team has the experience to manage a large utility. Water facilities represent $2.7 billion in operating assets, compared to Nevada Power's $2.6 billion, and SNWA has a strong track record in long-term planning and management of complex utility operations. Nevada Power workers will be retained and given the opportunity to revitalize the operations and service of the company.
Buying Nevada Power is one of the most important steps our region can take to ensure long-term economic stability. There are vested interests that will say no and resort to academic arguments, philosophical differences, scare tactics or complaints about risk to inhibit a real solution. What its executives will not say is what Sierra Pacific proposes to do instead. How does the company plan to return to financial health, build (and pay for) critically needed power facilities, and not affect local customers?
In the time it took SNWA to design, build and operate an integrated regional water system that supports 1.4 million residents, not one power plant or major transmission system was constructed, with the exception of a transmission system built by SNWA. How will the needed work be done to our power system, while at the same time returning rates to an affordable level?
The final answer will affect the future of our community for decades to come. It is our hope that Sierra Pacific Resources and its board of directors will enter into discussions with SNWA on this critical issue. For the sake of ratepayers, the company, its workers and our community, Sierra Pacific should do the right thing.
By Walt Higgins
Walt Higgins is chairman, president and chief executive officer of Sierra Pacific Resources, the parent company of Nevada Power.
Nevada -- particularly here in the south -- is still reeling from its last energy crisis when a dysfunctional political and regulatory system in California, coupled with a regional energy shortage, created havoc and sent prices skyrocketing in electricity markets throughout the West.
Now Nevada is careening toward a new crisis: another severe energy shortage that may be only two to three years away and which could seriously imperil the state's long-term growth and prosperity.
At Nevada Power, we recognize the dangers that loom over the not-too-distant horizon, and our generation, transmission and other experts are working tirelessly to keep the electricity flowing, the lights on and the economy purring as it has for nearly a century through world wars, the Great Depression and the turmoil of many other economic and social events. This is not to mention the current threat of more war and economic uncertainties.
I do not believe this is the time for hostile rhetoric. It is a time for serious contemplation and action on what needs to be done to assure stable and reliable power. Nevada is not alone. Virtually every Western state faces similar dilemmas.
Regrettably, too many people are doing little to deal with the problem. Instead, they are impeding efforts to cure it. They have flatly rejected recommendations for all interested parties to work together to develop the new power generation that our state needs. Rather, they propose to plunge our citizens into new public indebtedness of more than $3 billion that, standing alone, could amount to almost twice the state's annual spending from the general fund budget.
And all of this would accomplish little more than change the name on the door at Nevada Power.
Proposals for a government takeover ignore the real problem: a shortage of electric generation capacity that's getting worse by the day. Our state's energy needs are growing 250 megawatts per year. Putting that in perspective, this amounts to providing power for the equivalent of 50,000 homes. Clark County comprises about 80 percent of the electric power growth -- adding thousands of new residents and hundreds of new jobs every month. Of course, increased power needs for new and existing businesses are included in this growth, so it is clear that without the necessary energy supplies, our prosperity cannot continue, and without economic growth, we all suffer.
Nevada's energy prospects have grown bleaker in recent months as one major power generator after another throughout the region has canceled or delayed new power plant projects in response to drastically changing economic conditions.
Just over a year ago, eight projects in Nevada providing over 6,000 megawatts of much-needed new electric generation were scheduled to come on line between 2002 and 2004. Now most of those have been postponed, downsized, mothballed or entirely abandoned. Currently, less than 800 megawatts of new generation is projected to be in service in the state by next summer and an additional 1,200 megawatts by the end of 2004. To put this enormous loss in further perspective, in Southern Nevada peak summer loads exceed 4,600 megawatts. In the north, it is about 1,600 megawatts at peak.
Nevada's energy-supply situation has been tenuous for nearly two decades. Southern Nevada imports about 68 percent of its electricity needs during peak demand periods. The north is somewhat less challenged, relying on imports for 25 percent during peaks. We vitally need the power both to meet growing demands and to provide a more secure generating base that could insulate Nevada from future shocks. But we cannot continue to rely on huge quantities of imported energy in a wholesale electric market that we have seen turn ugly and volatile.
We are part of a giant power pool that spans the entire West, Southwest and Rocky Mountain regions. These areas have two traits in common: (1) all are growing rapidly and (2) all are experiencing serious shrinkage of new power plant projects. This entire region is short of power to ensure an adequate supply. And the problem is worsening.
For Nevada, the situation is particularly ominous.
The balance is so delicate, it takes only a hiccup to throw it off kilter. What happened in 2000 and 2001 was a severe convulsion -- an out-of-whack energy system in the giant California market, unprecedented hot summers, a severe shortage of hydro-power throughout the West, transmission bottlenecks in the energy grid and alleged market manipulation by power generators seeking to cash in on the disarray. It could easily happen again.
To ensure that our residents and businesses continue to have the power they need, when they need it and where they need it, experts must work with state officials on proposals to cooperatively develop new power plants. This is our job and our duty, and this is where we are focusing our energies.
To those who propose spending billions to acquire the Nevada Power distribution system, I pose one simple question: Will all the new public debt do anything to improve our ability to keep the lights on? The answer is an unequivocal "no."
A much better use of these huge sums of public funds would be to take steps that will help to strengthen Nevada's energy resources. The future of our region demands that we do no less.
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