Plants’ construction likely regardless of rate results

Kevin Rademacher

Thursday, Feb. 5, 2004 | 11 a.m.

As Nevada Power Co. continued to defend its $133.5 million rate increase request on Wednesday, executives maintain that a plan approved last year to build new power plants will move forward regardless of the fate of the request.

In a proposal approved by the state Public Utilities Commission in November, Nevada Power was granted permission to spend about $450 million on two new power plants that would go into service by 2007.

Those projects, however, could be more expensive if the company cannot repair its credit rating, a major goal of the current general rate increase request, said Michael Yackira, chief financial officer for Nevada Power's parent company, Sierra Pacific Resources.

"If we can get to investment grade, it would lower our debt costs," Yackira said outside of the PUC hearings.

Chief among the criticisms in the ongoing hearing is Nevada Power's request to raise its return on equity to 12.4 percent. Yackira said the construction projects were based on the current return of 10.1 percent and would not require the issuance of additional equity. Instead, the construction would be financed with debt.

The company maintains that if the higher return on equity can spark additional investment in the company, it would ultimately lower the debt costs through an improved credit rating.

"In the long run, customers would benefit," Yackira said.

Roger Morin, an economist testifying on behalf of the Utility Shareholders Association of Nevada, said Nevada Power is paying about 8.5 percent in interest on its long-term debt. Better-rated utilities pay 6 to 6.5 percent in interest.

Still, Swami Venkataraman, a utilities analyst with Standard & Poor's, said the company will likely struggle to raise the capital for new power plants.

"The large construction projects are going to be difficult regardless of the outcome of this case," he said. "They are going to require the issuance of debt, and it would be difficult for them even if the company got what they wanted."

Nevada Consumer Advocate Tim Hay was more optimistic about the power plant projects and maintains his skepticism over the rate case request.

"From our analysis, they really don't need anything additional in rates to go forward with the new plants," he said.

While Hay conceded that the interest costs would be high if the debt rating was not improved, alternatives exist even if the commission rejects Nevada Power's request to allow it to begin rebuilding its credit.

"There's other options out there to just issuing high-cost debt," he said. "Things like partnering with a large customer or another power supplier to build a plant can allow the utility to take advantage of another company's better credit."

The ongoing 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.

The case is scheduled to continue through Feb. 11.