A proposed $180 million cut in Nevada Power Co.'s $195 million rate recovery plan could push the utility into further financial distress and prompt it to examine a takeover bid proposed by the Southern Nevada Water Authority, an official says.
In a draft order released Sunday morning, State Public Utilities Commissioner Adriana Escobar Chanos proposed the disallowance, citing many of the same imprudent power-buying practices that led to a $437 million disallowance a year ago.
The order was to be considered for approval or adjustment during a meeting of the full, three-member commission this afternoon.
Last year, the draft order called for a disallowance of $257 million -- but the disallowance was raised by $180 million during the hearing.
Officials said it is unlikely that proposed disallowance would be reduced at today's hearing.
"I think it's pretty likely that it would hold right at that number," said Nevada Consumer Advocate Tim Hay.
Nevada Power executives received the draft order Sunday morning, but declined to comment until a final order was issued by the commission, said company spokeswoman Sonya Headen.
In its quarterly filings with the U.S. Securities and Exchange Commission, however, executives with the local utility's parent company, Sierra Pacific Resources, warned of the consequences of another major disallowance for Nevada Power or its Reno-based sister utility, Sierra Pacific Power Co.
Such a setback, the filing said, "could make it difficult for one or more of Sierra Pacific Resources, Nevada Power Co. or Sierra Pacific Power Co. to continue to operate outside of bankruptcy."
The Southern Nevada Water Authority last year made a $3.2 billion offer to buy Nevada Power. The electric company has maintained it is not for sale. Another disallowance could change that stance, Hay said.
"That's certainly an option," he said.
Observers said it is likely that the water authority bid would be a topic of discussion at Sierra Pacific's annual shareholders meeting this morning, just hours before the PUC hearing.
The current disallowance could be accompanied by a corresponding increase in the so-called "base tariff energy rate" to cover future costs for fuel and purchased power, the order said.
Despite this higher tariff, customers will see their bills decline because of the expected $180 million disallowance.
That would limit the rate cut for customers to the same 5.3 percent Nevada Power originally proposed, giving the average residential customer using 1,250 kilowatt hours of electricity a $6.39 break on their monthly bill.
The base tariff increase would mean consumers would be paying more for their current and future power, instead of relying on rate increases to make up the difference after the fact.
Still, an increase in the base tariff rate would not keep the company from having to write off $180 million, putting the company's already weak credit rating in jeopardy.
"You have a company that is already in junk status and you are cutting away revenue," said Jake Mercer, a utilities analyst for US Bancorp Piper Jaffray.
He said a depressed debt rating is likely to cost consumers in the long run as the cost of capital goes up for Nevada Power and Sierra Pacific Resources.
Last year, the nation's major debt rating firms slashed the company's status within 24 hours of the $437 million disallowance.
In the parent company's recent quarterly earnings statement, executives blamed much of a $16.5 million loss on increased interest costs associated with its credit rating. The company went from paying long-term interest rates of as low as 2 percent to rates in excess of 10 percent.
Mercer said those higher capital costs are likely to affect customers more than a 5.3 percent rate cut, and he questioned the logic of the commission in proposing such a disallowance.
"You take a rate cut now, and it might appease customers now, but in the long run, it will be to the detriment," he said.
The biggest disallowance proposed in the draft order is $75.8 million related to a 1999 contract that Nevada Power never finalized with Merrill Lynch. That deal, the draft order said, would have provided 25 percent of the utility's power at competitive rates. By failing to enter into the deal, Nevada Power was left buying power at inflated prices during the Western energy crisis of 2000 and 2001.
The company failed to enter into that deal, or a similar deal with another supplier, "when the information at the time clearly indicated that ratepayers were at considerable risk due to the large open position," the draft order said.
Nevada Power argued during two weeks of testimony in the rate case -- and in a $600 million lawsuit filed last month against Merrill Lynch -- that the deal would have never been feasible. The utility also questioned whether Merrill Lynch could have met its obligations under such a deal.
Last year, the Merrill Lynch contract accounted for $180 million of the total disallowance. The draft order pointed out that an April 28 district court ruling upheld that disallowance, clearing the way for consideration of the failed contract in the current case.
The current disallowance proposal also includes $64.3 million in excess power purchases and more than $40 million for bad natural gas purchases.
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