Wednesday, Feb. 4, 2004 | 10:56 a.m.
Financial health and shareholder return were points of contention on Tuesday as Nevada Power Co. began defending a $133.5 million annual rate hike request before the state Public Utilities Commission.
A key sticking point in the opening hours of the general rate case hearing was the company's request to increase its return on equity -- the return for shareholders -- to 12.4 percent. The current rate is 10.1 percent.
PUC staff and other interveners in the case grilled Michael Yackira, chief financial officer for Nevada Power's parent company Sierra Pacific Resources, and William Avera, an economist testifying on behalf of the utility, on the logic behind the increase.
William Stanley, a PUC attorney, asked Yackira why the company went with the 12.4 percent when Avera had determined that 14 percent would be justified.
"We are trying to balance the needs of shareholders and the needs of customers," Yackira said.
Stanley implied that the company could not justify such a return. Both Yackira and Avera said a return of at least 12.4 percent would be required to attract investors to a company that is suffering from a junk credit rating.
"No investor is going to get in a bed that's already on fire," Avera said. "The return has to be higher than the industry average."
Ernest Figueroa, a deputy attorney general for the state Bureau of Consumer Protection, pointed out that the company's credit was downgraded only after the PUC disallowed more than $400 million in rate recovery Nevada Power requested in 2001. He asked if allowing a higher return would be contradictory to the earlier decision.
"It is not a reward," Avera said. "It is a necessary increment of return to attract capital to this company."
Yackira said the rate is ultimately necessary to rebuild the company's financial health.
A general rate case allows the utility to request from regulators additional revenue for the cost of building and maintaining power plants and transmission lines as well as construction costs associated with meeting customer growth. The company also is allowed to request a return for shareholders.
If approved by regulators, Nevada Power's general rate case request would increase the average residential bill by 9.8 percent over the next two years. The company has proposed collecting $50 million this year, beginning April 1, and the balance in 2005.
Fred Schmidt, an attorney representing the Southern Nevada Water Authority, pointed out that the company's stock price, and corresponding access to equity capital, has improved since the June 2003 period on which it based its rate increase request.
In that month, the company's market capitalization was about $700 million, based on a stock price of about $6 per share. The company's market capitalization is now at about $920 million on a per share price of about $8.
Eric Witkowski, a senior deputy attorney general for the Bureau of Consumer Protection, and Kirby Lampley, a policy advisor for the PUC, also pointed out that the company also has access to additional capital through the authority to issue nearly $500 million short- and long-term debt already approved by the commission.
Yackira, however, said that with the company's poor credit rating, issuing bonds could still be challenging.
"The availability of such credit facilities is what's in question," he said.
In testimony filed prior to the hearing PUC staff recommended a $17.1 million rate increase, more than $116 million less than the utility requested.
The BCP recommended throwing out the entire increase request and refunding more than $1 million to ratepayers. MGM MIRAGE, one of the utility's largest customers, is requesting a $3 million rate decrease.
In a separate case that will begin later this month, Nevada Power is seeking an additional $173 million increase of so-call deferred rates to cover higher costs of past and future fuel and power purchases.
If both cases are approved the average customer's monthly bill would rise from $103.81 to $114.18 on April 1. Based on the phase-in strategy for the rate increases proposed by the utility, rates would rise again in April 2005 to $116.51.
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