Tuesday, May 13, 2003 | 10:56 a.m.
A proposed $180 million rate disallowance facing Nevada Power Co. was cut by regulators to $47.3 million, a move questioned by the state consumer advocate but cheered by investors.
The stock of Nevada Power parent Sierra Pacific Resources jumped 20 percent this morning, trading at $4.53, up 76 cents on news that Nevada Power can recover most of its fuel and purchased-power costs for the year ending in September 2002.
Final language of the proposed ruling was to be approved this afternoon by the state Public Utilities Commission, but the totals are not expected to change.
The decision will allow Nevada Power to recover $148.3 million of its original $195 million request for fuel and purchased power costs accumulated serving customers between October 2001 and September 2002. The utility will now recover those costs through higher rates over the next three years.
Combined with lower projected costs for future fuel and purchased power, the disallowance will create a 6.3 percent rate decrease in the first year. That would save the average residential customer using 1,250 kilowatt hours of electricity about $7.50 per month, up from $6.39 in monthly saving proposed in the utility's original plan.
An effective date for the new rates could be determined by the end of the month.
Nevada Consumer Advocate Tim Hay criticized the PUC's decision.
"It certainly improves the company's financial position," he said, "at the expense of Southern Nevada ratepayers."
Jake Mercer, a utilities analyst with US Bancorp Piper Jaffray, agreed that the financial position of the company got brighter with the ruling.
"I'm impressed," he said. "Obviously, we're talking about a huge change of course. I think it's a positive step for the state and the utility in the long term.
"If you went with the $180 million we could be talking about a state that had thrown the utility into bankruptcy."
Heading into the day, Nevada Power officials faced a draft order from PUC Commissioner Adriana Escobar Chanos that proposed the $180 million disallowance. Escobar Chanos, who presided over two weeks of testimony, said that figure was based on a long list of what she called imprudent business practices.
Hay said the commission should have given greater weight to Escobar Chanos' recommendation.
"Obviously Commissioner Escobar Chanos, who presided over the hearing and heard all of the evidence, had very strong feelings that the imprudence should be disallowed," Hay said.
Hay did not rule out a legal challenge to the ruling.
"I believe the record is replete with imprudence," he said. "My inclination would be to seek judicial review, but we will wait until we review the final order to make that decision."
Once the hearing began, it appeared PUC Chairman Don Soderberg and Commissioner Richard McIntire had no stomach for the large disallowance Escobar Chanos had proposed.
Soderberg said it would not have an effect on his ruling, but he brought up the specter of bankruptcy looming over the Las Vegas electric company if it were forced to absorb a major disallowance. He said policy advisors told him the company could only manage a disallowance of $90-100 million without being forced to seek bankruptcy protection.
With that, Soderberg and McIntire challenged a proposed $71 million disallowance recommended by Escobar Chanos related to a 1999 contract Nevada Power did not execute with Merrill Lynch. That deal, critics argued during two weeks of hearings last month, would have supplied the utility with 25 percent of its power at lower rates.
In last year's rate case, the PUC disallowed $437 million of a $922 million rate recovery request proposed by Nevada Power. Of that disallowance, $180 million was attributed to the company's failure to enter into the Merrill Lynch deal.
Nevada Power had argued this year that Merrill Lynch did not have the expertise or resources to execute such a deal. The utility also filed an $850 million lawsuit against Merrill Lynch for allegedly providing false testimony to the PUC last year -- testimony Nevada Power said contributed to the disallowance.
"This year we know more," said Soderberg in voting to throw out consideration of the deal. "We have to ask ourselves, can we bankrupt this utility based on e-mails that have been discredited?"
McIntire, who was the harshest critic of Nevada Power in last year's rate case, also pushed to ease disallowances.
"I find myself contemplating how different a position we are in now as opposed to last year," he said. "I characterized the situation as the Keystone Kops last year. I am happy to report that the Keystone Kops have been disbanded."
McIntire said the company's risk management system was on the way to becoming "state of the art."
"Management has been very focused," McIntire said of improvements over the past year. "We got their attention."
Hay criticized that perspective, charging that the PUC is supposed to confine its ruling to the October 2001 to September 2002 period. That does not allow for improvements made since the last rate case.
"It is disconcerting, particularly in light of the fact that the commission had so much evidence of imprudence," Hay said.
McIntire and Soderberg also chopped a proposed $62 million disallowance for electricity purchased down to $41 million and threw out a proposed $35 million disallowance for gas purchases.
Escobar Chanos said the energy and gas purchases were imprudent, based on a risk management committee that met infrequently, failed to plan and kept incomplete records.
"The people that were involved were unqualified and unsupervised," she said. "These failures led to my findings of imprudence."
Escobar Chanos also argued that her proposal was based on decisions the company made that affected the October 2001 to September 2002 time period, not improvements the company might have made over the past year.
"I understand we are in a different place now," she said. "But I am looking at it in the time it occurred."
Walter Higgins, president and CEO of Sierra Pacific Resources, parent company of Nevada Power, said the company would not comment on the ruling until it was finalized this afternoon.
In another move by Sierra Pacific Resources, the company entered into an agreement to a rate recovery disallowance at its Northern Nevada subsidiary, Sierra Pacific Power, of $45 million over the next two years. That deal was agreed to by the utility, PUC staff, the state Bureau of Consumer Protection and the several large customers.
The deal will save customers about $30 over two years from current rates.
The agreement was struck on the opening day of the company's rate case. The utility had sought recover of $15 million in fuel and power costs.
"This agreement, combined with a Nevada Power ruling, puts behind us two major uncertainties brought about by the Western energy crisis," Higgins said.
The Sierra Pacific deal is scheduled for a PUC vote on May 19. Higgins said the deal would call for a one-time, after-tax write off of about $29 million.
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