Nevada utility merger on track

The boards of directors of Nevada Power Co. and Sierra Pacific Resources Inc. will meet this month to determine if the conditional merger approved by the Public Utilities Commission of Nevada last week is still viable to investors.

Early indications from company executives are favorable.

"While this approval does include a number of important conditions which we need to further evaluate, we feel the general substance of the decision recognizes the positive value of the merger for the entire state of Nevada," said Malyn Malquist, chief executive officer of Sierra Pacific. Malquist would be the top executive of the merged company.

"It appears the decision is consistent with our original intent to merge our two companies in order to increase efficiencies, provide price stability and jump-start competition," added Michael Niggli, president and chief operating officer of Nevada Power.

The boards and company management will review the PUC's 132-page order, unanimously approved Thursday morning. If the two companies feel they can comply with the conditions listed in the order and still maintain the savings they sought with the merger, the proposal will go to the next regulatory hurdles.

The companies expected to get the most scrutiny at the PUC level since 30 organizations filed as intervenors in the case -- some of them potential future competitors.

Assuming the merger proposal goes forward, it must win approvals from the Federal Energy Regulatory Commission in Washington and the Securities and Exchange Commission, since the two companies are publicly traded. The merger plan also will be reviewed by California's utility regulatory body, since Sierra Pacific serves some customers on the California side of Lake Tahoe.

Sierra Pacific's attempt to merge with Washington Water Power Co. in 1995 failed at the FERC level, mainly because some approval deadlines could not be met, not because the agency had any problems with the merger itself. State officials familiar with the FERC process said it has since been streamlined.

"In all, the commission's order attempts to meld Sierra Pacific's and Nevada Power's desire to merge in order to be a strong competitor in the future with the realities of the need to create a competitive marketplace as directed by the (Nevada) Legislature," said Commissioner Judy Sheldrew, who served as presiding officer in the merger case.

"It also protects ratepayers from risk and creates an incentive for shareholders to see to it that their management performs as promised. I truly believe this is a balanced package that is win-win for everyone."

The PUC order said the merger was approved conditionally to ensure the public was protected from a potential loss of competition in the electrical industry. Commissioners concluded that without a merger, the two companies probably would be competitors in each other's service areas when the restructuring of the industry takes place next year.

The PUC order said it was "inconsistent to approve a merger without conditions that protect the public against the loss of competition."

One of the biggest issues of the merger, the goodwill premium being paid for Sierra Pacific shares, is being solved over a three-year period. The companies have been directed to file cases to re-establish new rates in 1999 and, after three years, they'll file another rate case to evaluate whether their projected merger savings covered the costs of the marriage.

The commission offered an incentive: If the merger savings are realized in the three-year period, shareholders can recover some of the acquisition premium.

The order also permits the two companies to sell their power generation plants if the plan, to be filed with the commission, assures that Nevada ratepayers get reasonably priced generation services from the divested units. Nevada Power and Sierra Pacific own 11 power plants worth an estimated $1 billion.

But the order rejects the two companies' request to use the after-tax proceeds of the sale of power plants to reinvest in rate-based transmission and distribution projects. The commission said state law directs the proceeds be applied to reduce any stranded costs of the existing utilities that normally would be passed on to ratepayers after the move to competition.

"Stranded costs" for the two utilities are the long-term contracts they have to acquire wholesale power above market rates to cover high-use periods.

The order gives utility management an incentive to keep stranded costs down, saying that shareholders can keep any after-tax gain from the sale of the power plants after the stranded costs are paid off.

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