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[IMAGE]
IssueAlert for  April 4, 2001 

Nevada Blocks Sale of Generation Plants; 
Re-Regulation Now Likely for State

by Will McNamara 
Director, Electric Industry Analysis

[News item from California Energy Markets] Nevada officials rushed through 
measures designed to stop the sale of power plants by Sierra Pacific Power 
and Nevada Power with a total value estimated at $1.7 billion. The Nevada 
Assembly voted to pass Assembly Bill 369, which halts the plant sales and 
stops restructuring in the state.  

Analysis: For the last several weeks, Nevada officials monitoring the energy 
industry in the state have oscillated between assisting the financially 
strapped utilities under parent company Sierra Pacific Resources, or 
preventing what they fear will be a repeat of the California energy crisis. 
The measure taken late last week by the Nevada Assembly is essentially an 
attempt to ensure cost-based rates in the state, reduce the potential risk of 
summer blackouts and wait out the uncertainty surrounding power supply and 
electricity prices in the West. However, the measure does little to alleviate 
the financial burden weighing on Nevada's major utility companies, and in 
fact raises the possibility for further debts that Sierra Pacific and Nevada 
Power may have to carry to comply with several of the measure's related 
requirements.  

The key provision of Assembly Bill 369 blocks the sale of power plants before 
July 1, 2007, although Nevada utilities will be allowed to apply to the 
Public Utilities Commission of Nevada (PUCN) for plant sales that include a 
state of "substantial financial emergency" after July 1, 2003. The measure 
directly impacts a pending sale to AES Corp. of a 14-percent interest (220 
MW) in the Mohave Generating Station, located in Laughlin, Nev., that is 
presently owned by Nevada Power. AES had agreed to pay $133.5 million for the 
14-percent interest in the plant. Under terms of the state's restructuring 
legislation, Nevada Power and Sierra Pacific Power were ordered to sell their 
power plants to alleviate concerns about market power. Toward that end, the 
holding company and its wholly owned utility subsidiaries commenced a public 
auction of approximately 2,900 MW of power generation facilities.  

Of Sierra Pacific Resources' nine power plants, which are mostly fired by 
natural gas and coal, seven had been entered into sales agreements and were 
awaiting final approval when this Assembly measure was passed. The PUCN had 
actually approved the sale of the Mohave plant last year, representing the 
first sales transactions of one of the utilities' plants. However, since the 
PUCN granted its approval of the Mohave plant, Nevada officials have grown 
increasingly concerned about instability in the Western power markets and the 
power supply problems in California.  

Tom Hay, chief of the Nevada Attorney General's Bureau of Consumer 
Protection, initiated the block against the sale out of concern about power 
supply in the state. Specifically, Hay proposed that the Mohave plant should 
remain under the control of Nevada Power for the time being because it burns 
coal, a low-cost fuel that can be relied upon to stave off blackouts in the 
state. In addition, Hay raised the concern that, should the sale of the plant 
be approved, the new owner AES could decide to sell the power produced by the 
plant outside of the state after a two-year buy back agreement expires in 
2003. By keeping the Mohave and other generating plants under the ownership 
of Nevada utilities, state officials believe that they can retain regulatory 
control over the price of power.  

Nevada Governor Kenny Guinn agreed that the plants should not be sold at this 
time and said that keeping the plants would protect Nevadans against high 
prices on the wholesale power markets. Guinn also expressed his intention to 
block restructuring in the state throughout his term as governor, which ends 
in 2003. If he is elected for a second term and can see that the markets have 
stabilized in the West, Guinn said he would consider allowing competition in 
the state sometime after 2003. 

For its part, AES says that it will seek legal action to force the sale of 
the plant to proceed. AES argues that the Nevada Assembly's measure is not 
constitutional and violates the sales contract already approved by the PUCN. 
AES also pointed out that the Mohave plant is 30 years old and will require 
significant repairs and improvement, an investment that it was willing to 
make but one that would cause an unnecessary financial burden on Nevada 
Power. 

Moreover, the negative financial impact that the Nevada Assembly's measure 
might cause is a major point of contention for Nevada Power and Sierra 
Pacific (along with the two Assembly members who voted against the measure). 
A spokesperson for the utilities said pending sales of power plants would 
provide the two companies with about $1 billion in cash, which "would go a 
long way to help us buy fuel and purchase power." As I discussed in my 3/8/01
IssueAlert the utilities' parent company Sierra Pacific Resources continues 
to struggle financially, so much so that a pending acquisition of Portland 
General has now been scrapped. Sierra Pacific Resources reported a 
significant fourth-quarter loss ($18.2 million) as a result of soaring costs 
of power in the western United States. The company incurred losses as a 
direct result of "the growing and unrecovered cost of purchased power in the 
volatile wholesale market." The company attributed the latest quarter's loss 
to nearly $258 million of unanticipated fuel and purchased power costs. 
Although the Nevada Assembly's measure passed with a 9-2 vote, one assembly 
member recognized the fact that if "we weaken [the utilities] to the point 
where they can't borrow to purchase fuel, we won't have power." Consequently, 
the state could still find itself with a compromised power supply, despite 
its efforts to retain state control over existing power plants. 

Additional financial burden could be placed on Nevada Power and Sierra 
Pacific as a result of other requirements that are included in related 
Assembly measures. For instance, AB 418 calls for gradually increasing the 
amount of green power used by the utilities to 15 percent (from its current 
0.2 percent). The bill allows for the PUCN to fine the utilities $10,000 a 
day or a total of $3 million for failing to buy the required amount of 
renewable energy. Although a representative of Sierra Pacific Resources said 
that the company supports the use of renewable power, the Assembly measure's 
requirement was considered "so much, so quick, so fast." 

The block on the power sales and indefinite delay in the start of competition 
essentially returns Nevada to a re-regulated state. This is another example 
of the continuing fallout that has resulted from the California energy 
crisis, especially among neighboring states in the West. As another example, 
New Mexico recently decided to also delay the start of competition until 
2007. Western states, which in one way or another have felt the direct impact 
of the power crunch in California, have become more cautious about 
deregulation and seemingly are in no hurry to open their markets to 
competition (despite the fact that deregulation proceeds in other areas of 
the country). 

However, unlike California, where the state government now has an active role 
in purchasing power and may take over the utilities' transmission assets, 
Nevada Gov. Guinn has expressed no interest in having the state or local 
governments take over the jobs of electric utility companies. Rather, Guinn 
merely wants to retain the control that the state traditionally has had over 
setting utility cost-based rates, an authority that would become diluted if 
out-of-state power companies own generation assets located in Nevada. 
Further, Guinn wants to return to deferred energy rates (also known as 
fuel-adjustment clauses), in which a utility is allowed to seek 
dollar-for-dollar adjustments in rates to recover costs associated with 
purchasing power on the wholesale market. As opposed to monthly rate 
increases, Guinn believes that an annual rate increase*which Nevada Power and 
Sierra Pacific would have to request and justify*would "smooth out the ups 
and downs of power and fuel costs over the year." In addition, Guinn believes 
that the combination of state regulation and cost-based rates offers a better 
strategy for the state than attempting retail competition at this time. To 
supplement power supply, Guinn believes that Nevada should promote the use of 
merchant plants rather than relying on the incumbent utilities to build 
additional generation.  

Moreover, the Nevada Assembly measure brings competition in the state to a 
screeching halt (at least for the next few years). However, the larger issue 
at hand presently is the precarious financial state of Sierra Pacific 
Resources and its utilities. Without the cash that would have been gained 
from the sales of its power plants, it is unclear how Sierra Pacific 
Resources will be able to pull itself out of debt. The utility already 
received an emergency rate increase last month, so any attempt to secure 
additional increases would surely be politically unpopular. Gov. Guinn's 
proposal regarding deferred energy rates may provide a mechanism to bring 
Sierra Pacific's rates more in line with its costs, but most likely such a 
rate increase would take effect only once a year. Meanwhile, Sierra Pacific 
must still procure some power on the wholesale market, where prices remain 
high (a situation that could get ever worse this summer if warm temperatures 
drive up demand). Thus, ironically, as much as state officials have tried to 
avoid the energy crisis found in its western neighbor, Nevada is increasingly 
exhibiting some of the same fundamental problems found in California.  

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