Opening electric industry has Nevadans worried : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

October 07, 2000

Opening electric industry has Nevadans worried, confused, tired and powerless

By David Strow LAS VEGAS SUN

For many Las Vegas residents, tacking on another $5 to $10 to a monthly power bill is an annoyance, an inconvenience.

But for 74-year-old Las Vegas retiree Lucille Young, it's a crisis.

Young, who lives on a fixed income, spends more than half of her monthly income on rent. That leaves discretionary income at a bare minimum, and Young searching for ways to reduce her power bill.

In the summer, that means leaving the air conditioning off a bit more than usual. In the winter, it means less heat and putting on more layers of clothing.

Her power bill topped $60 last month, the highest it's ever been. That means cutbacks in other areas, though Young isn't sure where the cutbacks could come if bills keep going up.

Now deregulation of the Nevada electricity industry is coming. Young isn't sure what it all means, though she's suspicious it will result in lower power bills for big casinos and higher power bills for her. When every dollar is precious, uncertainty can be the most frightening thing of all -- and Young is frightened.

"All I try to do is cut back," Young said. "Any increases make me struggle more. It's just frightening, every extra $5 or $10. These poor souls worse off than I am, I think about them all the time."

To differing degrees, all Las Vegans face the same uncertainty as this titanic change in Nevada's electricity industry approaches. Gov. Kenny Guinn -- a former utility executive -- has set Sept. 1, 2001 as the new deadline for competition to begin in Nevada.

What happens then? It depends on who you ask.

Many point toward nearby San Diego. There, this summer, electricity bills for some customers tripled as power grew scarce. In regulated Las Vegas, bills are increasing -- at a controlled rate, but increasing monthly nonetheless.

That's the result of a chronic shortage of electricity across the Western United States, and it's a big reason Guinn last week decided to delay deregulation by an additional 10 months.

Some are now wondering if deregulation is such a good idea.

"When deregulation comes into play, we're not sure what impact it will have on (low-income) residential consumers," said Carla Sloan, state director of the AARP, formerly called the American Association of Retired Persons. "It's very serious and scary to a lot of people. We need air conditioning in Southern Nevada. This is very much a pocketbook and health and safety issue for seniors."

But others say the energy crisis is temporary, and can be cured by the forces of competition. Competition results in lower prices, better efficiency, new innovations and more supply, deregulation proponents say. They point to the smooth transition of Pennsylvania, where rates have fallen for some customers by more than 10 percent.

Halting deregulation, many warn, will only make things worse.

"It's sort of the American way," said Walter Higgins, chief executive of Reno-based Sierra Pacific Resources, parent company of Nevada Power Co. "Wherever an adequate market exists to ensure competition, we believe as Americans that it should be competitive. Nobody can argue that you don't get much better service, features and price with long-distance (telephone service) than you've had at any time in history.

"The same thing should happen in the electric industry."

In 11 months, Nevadans may discover if that's true.

Variable pricing

Since the early days of the 20th century, the electricity business has been tightly regulated. In the business world, it's probably the furthest thing from old-fashioned American capitalism Wall Street has seen.

Electric utilities operated as state-sanctioned monopolies. In exchange for a monopoly on a specific region, the utility placed itself under the oversight of a state regulatory agency.

Instead of letting the market determine electricity prices, utilities had their rates set by state regulators after careful study. Each rate was designed to balance the interest of consumers with utilities' need for a reasonable profit, or return on investment. Hot summers or mild winters could cause electricity prices to surge or fall, but the rate could not change without the approval of regulators.

Under this system, electricity came within the reach of every American -- and it became a foundation of America's modern, high-technology economy. Indeed, it's difficult to imagine Las Vegas could even exist without power for the lights of the Strip and air conditioners.

But in Nevada and 22 other states, the system that guaranteed electric service at a regulated price is coming to an end.

Despite deregulation, Nevada Power will keep an absolute monopoly over the power lines that send power to each home, business and casino in Las Vegas. It will also maintain a total market share over the transmission lines that bring power into the city.

What's being thrown out is Nevada Power's lock on the business of supplying the electricity that flows over those lines. Once deregulation occurs, each customer will choose which company supplies their power. Consumers can also select which company reads their electrical meters and prepares their bills.

Eventually, the choices won't include Nevada Power, which is getting out of the electric generation business. Instead, customers will choose from relatively unknown names in Las Vegas like Duke Energy, Enron, NewEnergy Southwest and even

Though different companies will handle different parts of the business, it's unlikely customers will have to pay bills to three separate companies. What will probably happen is one company will provide the electricity as well as billing services to a customer, and pass along distribution costs from Nevada Power.

Under deregulation, state regulators will still have oversight of the electric industry, but only the market will determine how much consumers will pay for electricity. If electricity is plentiful, as it might be during the mild days of spring and fall, prices would temporarily plunge. If more power plants are built than the market could handle, prices would stay low.

By the same token, a hot summer or particularly cold winter would drive prices up, as customers compete for the precious electricity that can run air conditioners and heaters. If the supply of electricity remains at levels that don't meet demand, prices would remain high.

Electric consumers in San Diego learned that lesson in market economics this summer.

'Unregulated monopoly'

In 1999, San Diego became the first California city to test deregulation, when the final government-imposed rate caps were lifted away.

Lower prices? Hardly. This summer, some San Diegans saw their power bills triple. California Gov. Gray Davis slapped the rate caps back on, and state officials began investigating what went wrong.

Expensive power is a problem in both San Diego and Las Vegas. But Las Vegas customers, unlike their San Diego counterparts, still have a regulatory infrastructure to prevent such increases from hitting all at once.

Initially, Nevada Power wasn't supposed to be able to pass along these costs at all. Nevada's deregulation law said that after one final examination of rates, Nevada Power would have to cap its rates until February 2003.

The idea was to avoid explosive swings in power prices, particularly if customers weren't yet able to leave Nevada Power.

"When you go from totally regulated to totally unregulated in a market with scarcity, you have to build in safeguards or it won't work," said Senate Minority Leader Dina Titus, D-Las Vegas.

The rate cap only survived until July. Nevada Power sued the state after being denied a $110 million rate increase in its final review. In settling this lawsuit in July, Nevada Power won the right to adjust rates monthly through February 2003 to meet increased electricity costs.

"We have paid a very high price for power at various times, and it really was endangering the company in May and June," Higgins said. "We were in serious trouble because we were paying such high prices for power."

Since the Nevada Power agreement, three rate hikes have gone into effect, raising rates by more than 7 percent on residential customers. A fourth 1.4 percent increase is set to go into effect in November.

Theoretically, Nevada Power could raise residential rates by 63 percent over the next three years, while the state's largest consumers of electricity could see rates double. For the residential customer, an average bill could rise from $71 to $117 a month.

The move has enraged Democratic lawmakers, who accuse regulators of ignoring the Legislature's mandate. Several have vowed to examine the issue next year, though Guinn says he believes the hikes are appropriate.

"(Nevada Power) still has all of these protections, but the public has none," Titus said. "There's no competition, so you have an unregulated monopoly. They get these automatic rate increases with no hearing, no review and a auditor the power company pays for."

In theory, deregulation means customers will be able to escape these rate hikes by going with another company on Sept. 1. The reality, at least today, is that cheaper power probably can't be found, no matter where you buy your electricity.

An energy crisis

Regardless of their size, all customers will face one reality when competition begins -- there's barely enough power to go around in the West. Unless the problem is solved, higher electric rates will continue to trouble Nevada.

The seeds of this shortage were planted years ago, when Nevada Power, along with most other Western utilities, simply stopped building new power plants.

At the time, that made the most business sense. States like California were producing more electricity than they needed, and Nevada Power spent roughly $200 million a year just to keep building power lines for customers moving into Las Vegas. Since power plants are tremendously expensive, Nevada Power opted to meet its growing electricity needs by buying low-cost power from other utilities -- and that helped make Nevada's electric rates some of the lowest in the country.

Another reason for the building halt was the coming of deregulation. Since the utilities would soon be getting out of the generation business, they had little appetite to build new plants. But the companies hoping to get into the generation business had little desire to build too many new plants, since the timing of deregulation wasn't set.

But California was starting to demand more and more electricity, as its economy was spurred on by electricity-dependent high-tech companies.

During periods of normal demand, there was still more than enough power to go around. But this summer was anything but normal.

In May, the West started its hottest summer in 50 years. For utilities, it was the worst time for electric consumption to soar, since many plants are taken off-line during that time of year for maintenance.

The weather also meant dry conditions in the Pacific Northwest. Unfortunately for power companies, the Northwest is a source of cheap hydroelectric power -- and reduced water flow in rivers cut its production.

Most new power plants don't run on coal or nuclear fission, but natural gas. So when these plants began pouring out more and more electricity to answer the shortage, natural gas prices nearly doubled. That made the electricity the plants were producing that much more expensive.

Wholesale electricity prices, in some cases, rose five or six times. These electricity prices resulted in record profits for generation companies. For traditional utilities, they meant severe losses. For customers, they meant higher bills.

Deregulating in such an environment, Guinn believes, would be a disaster.

"I am not going to do anything that would shift that burden to the families of Nevada, nor the businesses of Nevada," Guinn said.

Milder weather will temporarily ease the problem, though that's not a long-term solution. The only way to permanently end the stampede for electricity is to cut consumption or build more power plants. But will generators be willing to make huge investments in Nevada power plants, knowing it will result in lower prices?

State Sen. Joe Neal, D-North Las Vegas, has been a vocal critic of deregulation. He believes it's little more than an attempt by the generation companies to create an electricity cartel, where power goes to the highest bidder. Once this structure is in place, Neal believes the last thing its members will want to do is build more plants, which would drive down prices.

"It's not competition, it's a matter of control of the electric supply industry in this country," Neal said. "In the electricity industry, there are concerns about (generators) holding back electricity until demand is high, then releasing it."

But generation companies say that's not the case. They point to plants that have been proposed for Nevada that could drastically increase electric supply. Plants have been proposed by Calpine Energy Co. of San Jose, PG&E Corp. of San Francisco, Duke Energy Inc. of Charlotte, N.C., and Enron Corp. of Houston.

"(In the past), there was no incentive to build power plants, because there wasn't a good rate of return," said Sandra McDonough, spokeswoman for San Francisco-based PG&E Corp., which hopes to build a power plant near Las Vegas that could supply enough power for 1 million homes. "Now, we take the risk of building plants in exchange for better rates of return than we would have gotten (under regulation).

"Higher prices signal that it's a good market to provide more supply."

Guinn believes Nevada can do more to encourage power plant construction. He envisions a long-term strategy that would involve offering incentives, such as fast-track approval procedures and tax incentives, to companies that build power plants in Nevada.

Since the approval process is so lengthy in California, Guinn believes such incentives would have companies building plants here. As a condition of his incentives, he'd require producers to give Nevadans first dibs on the electricity they produce. That would guarantee Nevada would have enough power to go around.

Guinn will also push energy conservation. State buildings will begin implementing measures to reduce power consumption, and Guinn is considering the use of tax incentives to encourage conservation programs by utilities.

"That helps with supply, but it helps customers equally as much, because people aren't paying for (wasted) power," Guinn said.

For Nevada, it boils down to a dangerous Catch-22. Deregulation is risky because there aren't enough power plants, but the only way to get those power plants is to deregulate.

"If the Legislature started thinking about changing it (deregulation), anyone thinking about building a power plant in Nevada would delay it," said Ron Tanner, utilities analyst with Wall Street brokerage Legg Mason.

But that's not going to stop Neal, who vows he'll move forward in the 2001 legislative session to stop deregulation in Nevada. Neal acknowledges support might be slim now, but believes consumer anger will continue to build if rates continue to rise.

"Tell me how a senior citizen is going to be able to afford these rates?" Neal said. "It's not going to happen. People are going to die in this process, because electricity is a necessity. It's going to wreak havoc with the public. I don't think anybody gives a damn about the public."

But Guinn insists he's looking out for everyone as Nevada moves into uncharted waters -- and that's why he's willing to wait.

"It is my goal to make sure deregulation works for everyone, not just a select few," Guinn said. "It is my responsibility to protect the people. It is up to us that the promises made about deregulation are kept to the people."

-- Martin Thompson (, October 08, 2000

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