Tuesday, March 23, 2004 | 11:01 a.m.
Public Utilities Commission member Adriana Escobar Chanos is proposing that the PUC cut Nevada Power Co.'s general rate case request from $133 million in additional annual revenue to $42 million.
The order is not final and will be debated by the full commission at a hearing Wednesday, but if approved as disclosed Monday, the average residential bill would increase $6.90 a month from the current level of $104.28.
A draft order proposed in a deferred energy rate case also expected to be decided Wednesday would raise rates another $4.69 a month.
Of the $91 million in proposed general rate case disallowances set forth by Escobar Chanos, PUC officials said the utility had agreed to $17 million. Of the remaining $74 million, the largest disallowance came in a reduction of the company's proposed return on equity. Nevada Power, which currently receives a return of 10.1 percent, had proposed raising that level to 12.4 percent.
Escobar Chanos recommended a return on equity of 10.25 percent. In hearings on the rate case, utility executives argued that the higher rate was necessary to attract investors to a company with a junk credit rating.
The commissioner disagreed.
"The commission believes that this level of return, which is an increase from the current level, will enable NPC to regain, over time, its financial health," the draft order said. "At the same time, this return will not impose a needless burden on ratepayers, and, as a result the commission's mandate to balance the interest of ratepayers, as well as shareholders, will be achieved."
The order also would disallow the inclusion of the company's cash balances in its rate base, reducing the revenue request by $15 million.
Another $7 million was disallowed that the company sought to recover from expenses related to a short-term incentive plan for employees.
"Since the 2003 STIP bears some resemblance to a bonus plan ... the commission believes that the allowing the recovery of these costs could be construed as awarding a bonus when NPC is not financially healthy," the order said. "Further, the exclusion of the program costs would allow the employees to share in NPC's financial difficulties as its shareholders and consumers have been asked to do so."
The proposal has sparked concerns over the utility's financial health.
"Once again they are looking at a large cut," said Jake Mercer, a utilities analyst for Piper Jaffray & Co. "When you continue to see disallowances and large disallowances, it does raise red flags for investors."
Mercer said that the large proposed disallowance would hold down the utility's already junk debt rating. He pointed to the utility's parent company, Sierra Pacific Resources, recent refinancing of $335 million in 10-year debt at more than 8.5 percent. Better-rated companies are getting interest rates nearly 4 percentage points lower.
"While I can agree with some of the rationale on the part of the commission, it is going to be a long-term detriment to the company," Mercer said.
The proposed rate increase across all customer classes, including businesses, will total 3.24 percent. Residential customers, however, would recognize a 7 percent increase in a move toward cost-based rates.
Parties in the rate case hearings had argued in favor of limiting a so called residential subsidy that puts a higher burden on commercial customers. MGM MIRAGE argued that over the last three rate cases the subsidy increased from $42 million to more than $83 million.
The draft order also proposed increasing the basic charge paid by all regardless of use from $5 a month to $6. Nevada Power had requested a $9 charge.
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