‘Innovative’ move makes NV Energy’s rate hike manageable

By Alexandra Berzon

Sunday, June 28, 2009 | 2 a.m.

Utility executives and government officials sat calmly Wednesday morning while Nevada Public Utilities Commission members Rebecca Wagner and Sam Thompson said residential electricity rates would rise an average of $10.25 a month under a new order.

At first glance, that didn’t sound as bad as it could have been for ratepayers — a 6.9 percent increase compared with the 16.7 percent that NV Energy had requested.

As attendees filed out of the small hearing room, NV Energy CEO Michael Yackira stood nearby under the spotlight of television cameras and encouraged residents to lower their energy bills by purchasing more efficient light bulbs and turning their thermostats up.

A television reporter asked him what he thought of the commission giving the company a small part of the rate increase it had wanted.

Yackira smiled and explained that’s not what had happened. The utility — a monopoly regulated by the commission — had come out OK.

“The financial health of the company is good,” he said.

And here is why:

The commission’s action will amount to an overall 6.9 percent increase over current rates. But those rates — which are adjusted through the year — are now relatively high, reflecting the high price the utility paid for fuel last summer. The commission actually granted the utility a 12.4 percent rate increase based on its capital investments. But because fuel prices rose and then fell, it won’t feel like it to customers paying today’s bills.

Such is the world of utility rates, where increases can be couched in ways that appear to soften the blow for customers.

Wednesday’s decision followed weeks of hearings before the commission for what is known as a “general rate case,” which occurs every few years. The regulated monopoly demanded a $305 million revenue increase based on the more than $1 billion it had invested in new power plants as part of a recent shift in strategy toward building and buying power plants.

After the decision was announced, commissioners invited public comment.

Nobody came forward.

Thompson said the increase will be tough on Las Vegans — but that it could have been much worse.

The commission’s action could have led to a whopping $31 average increase in monthly electricity bills during the summer.

Households here simply couldn’t have borne it, he said.

In the end, it was the price of natural gas and some clever maneuvering that avoided the larger increase.

“Difficult times call for solutions that are as innovative as we can possibly make them,” the commissioner said.

The utility had asked for a 16.7 percent increase on residential customers, which would have brought in $305 million in revenue for the company. Of that, the commission approved $221 million, or 73 percent, as commissioners sought to balance protecting ratepayers and not hurting shareholders’ and creditors’ confidence in the utility.

To avoid that initial $31-a-month jump, Thompson designed the increase to come in phases. The first 3 percent increase over current bills kicks in Wednesday. The second 3.9 percent will kick in in January, after the costly summer months.

To make the overall increase as low as 6.9 percent, Thompson made another out-of-the-ordinary move.

The portion of bills based on the cost of fuel is normally determined under a separate process from the general rate case, adjusted several times a year based on a rolling average. It works that way so the jump is never too extreme, nor the fall too sharp, and the cost to the ratepayer is always months behind the current market price for fuel.

As a result of last summer’s spike, rates in the past year rose slowly and, under the normal process, would start to gently fall.

Thompson did something very unusual in his order: He collapsed the expected drop in fuel costs into the same order that deals with capital costs, using the decrease in natural gas to offset much of the general rate case increase.

The deal to phase in the increase and to consider fuel rates shields ratepayers from the worst of the capital rate increase effects now, but ratepayers will pay later for the $85 million NV Energy is deferring, plus profits. That will be included in the next general rate case, to be held in a few years.

The state’s consumer advocate expects the utility to ask for at least as much more new revenue at that time as it did this time, based on its current spending trends.

“I admit this is an innovative move and an unusual move,” Thompson said. “But I’m confident it’s grounded in law and is one that’s economically viable.”

At the hearing, Thompson was cognizant of criticism. Former state consumer advocate Timothy Hay had suggested that it appeared the commission had used the falling price of natural gas to shade the true extent to which it had, in fact, ruled in favor of the utility in order to make ratepayers think the decision was a better deal for them than it really was.

“I didn’t use voodoo economics here,” Thompson insisted.

He simply wanted to make sure ratepayers don’t become alarmed and think their rates will shoot up more than they will, he said.

In an interview after the hearing, Thompson said he would have included the fuel costs regardless of how the commission had ruled in the general rate case.

“I think giving people the true impact is honest and open and says what is the actual increase they will see,” Thompson said. “The rate structure can be pretty confusing to a normal person. My goal is not to use smoke and mirrors. It’s to try to give out all the facts.”