CEO defends latest request to hike rates at Nevada Power

Kevin Rademacher

Tuesday, April 8, 2003 | 11:11 a.m.

Nevada Power's $195 million rate case got under way Monday with the company's top executive fielding questions about long-term contracts signed during the height of the Western power crisis.

Walter Higgins, president and CEO of the Las Vegas utility's parent company, Sierra Pacific Resources, was the first witness. More than two dozen experts are scheduled for what is expected to be two weeks of testimony before the state Public Utilities Commission (PUC).

The company is seeking to recover $195 million spent on fuel and purchased power to serve customers between October 2001 and September 2002. That increase, Nevada Power said, will be offset by lower prices for fuel and power in the future, creating a net $81 million rate decrease in the first year.

The PUC must issue a decision on the rate case by May 15.

Critics of the rate hike questioned the chief executive for hours Monday. A frequent point of debate were contracts the company signed with suppliers between July 31, 2000, and May 31, 2001.

Fred Schmidt, a Carson City attorney representing the Southern Nevada Water Authority, questioned Higgins about committing to those deals while prices were soaring. In June 2001, he pointed out, the Federal Energy Regulatory Commission (FERC) instituted price caps on spot market purchases that eventually brought down long-term prices as well.

"We entered into contracts when the forward price curve was still going up," Higgins said.

Those moves, he said, were encouraged by FERC, which was pushing companies to limit their reliance on the volatile spot market. That plan unraveled when FERC instituted price caps that affected only spot purchases. Companies like Nevada Power were still accountable for forward delivery on expensive new long-term deals.

"We had been way in the money before the caps," Higgins said. "After the caps, we were way out of the money."

Schmidt said that at the height of the market the company was as much as $1 billion in the money on the deals but ended up more than $1 billion in the hole when prices fell following the FERC move.

"With all that uncertainty, I guess I'm trying to figure out why commit to 1,500 megawatts for over a year into the future?" Schmidt asked.

"Based on all the market intelligence available, the problem was not going to get any better in 2002 than it was in 2001," Higgins responded.

Those same long-term contracts, Schmidt said, are now being appealed to FERC. Nevada Power has asked federal regulators to set aside those deals -- worth about $300 million -- claiming market manipulation created artificially high prices.

Late last month, FERC staff released a 300-page report corroborating manipulation claims, but initial indications from two of the three commissioners were that the contracts should stand.

Eric Witkowski, senior deputy attorney general with the Bureau of Consumer Protection, pointed to testimony last year by former Nevada Power President Mark Ruelle. In that testimony, Ruelle indicated that prices would eventually fall.

"Then did it make sense to buy 1,500 megawatts for 2002?" Witkowski asked Higgins.

"We both agreed eventually prices would fall," Higgins responded. "The question was when."

The argument over long-term contracts mirrored much of the debate in last year's $922 million rate increase case. The PUC eventually disallowed the recovery of $434 million in that case, calling the associated transactions imprudent.

Schmidt also called into question Nevada Power's contracted supply of energy for this summer. Higgins said he did not know if 100 percent of the energy needed for the summer had yet been been acquired, but that the company was following a predetermined resource plan.

"Do you think it's prudent to enter the summer without 100 percent of the peak-day supply?" Schmidt asked.

"We won't be entering the summer without 100 percent of peak-day supply," Higgins responded.

Last week, Higgins told a conference call of investors that three long-term deals recently approved by the PUC would give the company about 90 percent of that supply.

Current contracts will be important in determining the so-called "base-tariff energy rate" which accounts for the recovery of future fuel and purchased power costs.

If that rate is set too low the utility will need to recover those costs in another rate case next year. Critics of Nevada Power's current case have indicated that the company has set the base tariff rate too low. Fuel and purchased power costs, they said, are being driven up because of higher prices for natural gas, which fuels many power plants in the West.

Separately, the Public Utilities Commission staff has revised its requested disallowance of Nevada Power costs, from $80 million to more than $107 million. The change was based on miscalculations in staff's original testimony.