Nevada Power Authorities Clamor to Re-Regulate Industry

March 27, 2001

Nevada Power Authorities Clamor to Re-Regulate Industry

By John G. Edwards

Give me that old-time regulation.

That's the theme of electric energy policy-makers this year, as California continues to cope with rolling blackouts and as power prices soar around the Western United States.

It's a 180-degree switch from the policy direction at the state capital two years ago.

In 1999, lawmakers embraced competition and deregulation as a replacement for regulation of the state's two monopoly utilities, Nevada Power Co. of Las Vegas and Sierra Pacific Power Co. of Reno. They enacted an amended law to open Nevada's retail power markets to competition.

This year, however, Gov. Kenny Guinn and some legislators want to retain state regulation and cost-based rates, rather than try retail competition based on economic forces in the market.

"For 38 years, we've had the cheapest electricity in the Western United States," Guinn said last week during an interview to discuss his plans to help ensure Nevada has adequate and affordable energy supplies in the future.

For now, Guinn said he wants to retain Nevada Power and Sierra Pacific as regulated utilities as part of his strategy for coping with the power crisis. He expresses no interest in having state or local governments take over the jobs of electric utility companies.

Sierra Pacific Resources, the Reno-based holding company for the two utilities, has told the Senate Commerce and Labor Committee that it is willing to continue retail power sales in Nevada if the state delays deregulation.

This is a also switch for the company, which initially wanted to compete through affiliates in a deregulated retail market, and then decided to abandon that course and focus on being a "wires company" that provides alternative sellers with power lines.

Now the governor is proposing to allow large power users -- such as Strip casino operators, gold mines or even the state government -- to exit the regulated utility system in 2003. By then, these big customers could potentially buy directly from independent power producers, Guinn said.

"It would give you more low-cost power to serve small users and especially single-family homes and small business that probably wouldn't get into the (power) market on their own," Guinn explained.

Guinn said he will oppose deregulation throughout his first term but he isn't ruling out opening the market during a second term, should he be re-elected in 2003.

"I don't want to ever say never," Guinn said.

Guinn also wants to return to the old way of regulating rates for fuel the utilities use to produce power and to buy wholesale power for resale to retail customers.

In 1999, then-Consumer Advocate Fred Schmidt took pride in a portion of Senate Bill 438, which ended deferred energy rates.

Utilities have been using deferred energy rates, also known as fuel-adjustment clauses, since the 1970s -- the last major energy crisis in the United States. The system allowed utilities to seek dollar-for-dollar adjustments in rates to recover increases in the cost of fuel and wholesale power without preparing all-encompassing general rate cases, which scrutinized virtually all aspects of a company's finances.

Critics contended the mechanism had outlived its usefulness in the late 1990s and argued that there was no incentive for electric utilities to seek the lowest-cost power.

With the first energy crisis of the second millennium, Guinn now believes it's important to restore deferred energy pricing. He wants to do away with the monthly rate increases for fuel and wholesale power that the Public Utilities Commission adopted last July and return to annual energy rate cases.

Deferred energy cases could smooth out the ups and downs of power and fuel costs over the year, Guinn believes.

"That's good for the company, and it's good for the end users," he said.

A rate-making system similar to deferred energy works for Southwest Gas, he said. In addition, it has enabled San Diego Gas & Electric to remain economically sound while Southern California Edison and Pacific Gas & Electric are on the verge of bankruptcy.

Thomas Kinnane, a lawyer and lobbyist for Shell Energy, opposes deferred energy.

The utilities would build up balances they are owed and would need to be repaid by customers after they leave the utility and sign up with a competitor, Kinnane said. The cost of paying off these deferred energy costs would offset customer savings from competition "for a number of years," he said.

"I don't buy that at all," Guinn said. "That's an individual private corporation looking out for its own interests."

Guinn sees other advantages to deferred energy pricing.

"If it's deferred energy, they get to carry it as accounts receivable, and they can borrow on Wall Street" using the accounts receivables to secure the bonds, Guinn said.

Nevada Power, for example, needs $350 million to build transmission lines connecting four proposed independent power plants to the grid at Apex north of Las Vegas. Without deferred energy, they would need to raise the money through a rate case for the transmission lines, he said.

The companies may not be allowed to sell their power plants, which otherwise would have been a source of funds. Guinn, however, doesn't want the utilities to sell the plants.

As assets of regulated Nevada utilities, the rates charged for these plants is set by regulation based on costs, not market forces of supply and demand.

"As long as the (wholesale power) prices are escalating and the supplies are down," Guinn said he wants Nevada to retain its power plants.

He wants the utilities to enter more long-term contracts for power so they won't be so reliant on short-term purchases, which have had the highest prices during the Western energy crisis.

Increasing power supplies, he believes, will reduce prices for power.

"The only way you're going to put more supply into the grid is to build more plants," he said.

Guinn believes the state should rely on independent power plants, so-called merchant plants, rather than Nevada Power, in part because the utilities' finances are already stretched enough trying to satisfy transmission needs.

The power plants will burn natural gas. So Guinn, former chief executive of Southwest Gas, has been using his expertise to coordinate government and corporate efforts to increase the state's supply of natural gas. He has spoken with members of President Bush's Cabinet and other federal officials to get their support for his efforts to increase natural gas supplies, get rapid approvals on power plants and to obtain federal land easements for transmission power and gas lines.

Guinn told executives with the Williams Cos. of Tulsa, Okla., that he is working with four state governors as well to seek quick approval of their pipeline improvement project. Williams plans to increase the capacity of the Kern River Pipeline, which runs through Southern Nevada.

The Las Vegas Valley Water District has agreed to negotiate contracts with the four proposed power plants at Apex to supply water needed for power generation. In return, the generators are expected to commit 25 percent to 50 percent of their capacity for use in Nevada.

Conservation is a key component of the governor's energy plan. He estimates that businesses and consumers can conserve 15 percent to 25 percent of the power they use.

"It lets people know that there is a serious problem out there," Guinn said.