Empowering Nevada's Ratepayers
Seven Ways to Strengthen Electricity Deregulation in the Silver State
- Friday, February 23, 2001
Nevada’s policymakers are scared. The power crisis in California has made the Silver State’s governor, legislators and energy bureaucrats fear voters’ response to a possible Golden State-style electricity debacle in Nevada. But instead of biting the bullet and pushing for the tough but enlightened steps that will avert runaway electricity prices and rolling blackouts, most of Nevada’s decision-makers are leaning toward measures that will roll back deregulation. Their behavior is disturbing, because in the long run, the Silver State is well-positioned to benefit from electric choice. Regardless of whether Nevada embraces or shuns deregulation, the short term will surely bring higher prices for ratepayers—and political risk for politicians. But if the Silver State forges ahead with deregulation and implements all or most of the steps described herein, Nevada can weather the West’s power storm and thrive in an electricity market controlled by buyers and sellers, not politicians and bureaucrats.
1. Set a Date and Stick To It
Most deregulation plans, including Nevada’s, include a transition period during which retail price regulation remains, but ratepayers may choose alternate sellers. The Silver State’s phase-in process was originally scheduled to begin at the end of 1999. But that date has been moved up several times, and it is now on hold indefinitely while the governor looks for ways to “protect” Nevada’s consumers from rate hikes. (It’s difficult to see how putting off the phase-in period is shielding consumers from rising power bills—in Southern Nevada, for example, the regulated price of electricity has risen almost 16 percent since July. That increase is larger than the price hike faced by Californians, and it will continue to rise.) Delaying the start of the transition period sends a dangerous signal to the 13 companies which seek to be alternate sellers in Nevada. By continuing to avoid the phase-in of deregulation, the Silver State appears skittish about its commitment to electric choice.
Legislators need to be decisive on this matter. They should set a firm date after which ratepayers are allowed to leave Nevada Power and Sierra Pacific Power, and not allow the governor to continue to delay the process. They must also decide how long the transition phase will last—the shorter, the better. Choosing the proper length will be not be easy, but the phase-in process should not be longer than the period of time independent analysts expect new plants to be generating a significant amount of additional power in the state.
2. Adjust the Retail Cap
Opening Nevada’s power market to alternate sellers does not mean instant price spikes. During the phase-in period to full deregulation, retail rates for customers who stay with the state’s utilities should remain regulated. But an arbitrary retail price cap must not be imposed on the utilities. The Public Utilities Commission of Nevada (PUCN) should be directed to index the transition period’s cap to the wholesale price of electricity in the Western market. The cap should be adjusted on a regular basis, and it must not be set unnecessarily low. If retail customers are allowed to continue escaping the real cost of power through artificially low price caps, two things will happen. First, alternate sellers will not enter Nevada’s power market, since consumers will have no reason to switch to a new provider. Second, it will not be long before the state’s utilities develop financial woes similar to their counterparts in California. In the Golden State, ludicrously low retail caps have all but destroyed the two largest utilities, in addition to giving ratepayers no reason to conserve electricity during the crisis. What the Reason Public Policy Institute’s Adrian Moore and Lynne Kiesling wrote about California also applies to Nevada: “A market cannot work without market prices—consumers don’t know when to reduce consumption, and suppliers don’t know when to increase production. In the short run, price caps will only guarantee that utilities will continue to bleed red ink, suppliers will look for other markets in which to sell, and consumers will have no incentive to conserve electricity.”
3. Let SPR Lock In Low Rates
To satisfy both energy and securities regulators, before their 1999 merger into Sierra Pacific Resources (SPR), Nevada Power and Sierra Pacific Power agreed to sell their generation facilities. But as conditions of the sales, the utilities negotiated buy-back agreements which locked in electricity rates at 1998 prices. This means that SPR will be able to purchase a large supply of relatively cheap power for the next two years. The company estimates that the buy-back agreements will save Nevada ratepayers $875 million. Unfortunately, many bureaucrats and politicians now want to block the sales of SPR’s facilities. In an ironic twist, many of the same officials who thought it was important for SPR to get out of the generation business now believe it is vital for the company to continue producing power. Leading the charge against the sales is state “consumer advocate” Tim Hay. Earlier this month he released a five-year projection which purports to show that SPR’s divestiture will actually cost Nevada ratepayers $900 million. But Hay’s analysis is deeply flawed, because no one knows what the cost of power on the wholesale market will be after SPR’s buy-back agreements terminate. After 2003, it’s possible that wholesale electricity will cost SPR what Hay claims—or perhaps it will cost even more. But it’s far likelier that the price of wholesale power will fall. Declining prices are probable for three reasons: generating capacity in the West will grow during the next few years (one estimate holds that 60 new plants are possible for the region, and many existing plants are planning to expand); the strong demand for natural gas will spur exploration and development of the commodity, causing its price to fall; and a return to normal weather patterns will reduce demand and increase supply throughout the West. It is extremely irresponsible for Hay to claim to know what wholesale power prices will be years from now, and legislators should reject his junk analysis. In fact, the only thing that is known about Nevada’s future electricity costs is that if SPR is permitted to buy power for the next two years at 1998 rates, its customers will greatly benefit. Obviously, legislators and the PUCN should investigate the nature of SPR’s buy-back agreements, in order to verify the company’s claims. If the clauses in the contracts are sound, SPR should be allowed to sell its generation facilities. Legislators must also realize that even if they make the mistake of halting the sales of SPR’s plants, low power prices for Nevadans are hardly guaranteed. While the company’s coal facilities will remain cheap to operate, SPR will pay the same sky-high rates for natural gas that other generators currently pay. The final reason to allow the sale of SPR’s power plants is simple fairness. For years, the company has made countless business decisions based on the assumption that it would soon be out of the electricity-generation business. For Nevada’s legislators to reverse policy at the eleventh hour would not only harm Nevada ratepayers, it would pull the rug out from under SPR’s plans for the future.
4. Streamline Plant Approval
With booming demand in the state and throughout the region, it should be no surprise that major electricity-generation companies such as Duke, Reliant and Calpine see Nevada as fertile ground. That’s why the reported bipartisan support for a bill to streamline the plant-approval process in the Silver State is so encouraging. Even more encouraging is the PUCN’s demonstrated ability to quickly move companies through the approval process. For example, in December the agency granted a Utility Environmental Protection Act permit to Naniwa Energy, which is building a 360-megawatt plant outside Reno. Instead of taking the statutory limit of five months, the PUCN approved the permit application in two months. As long as fast-tracking the approval process even further does not favor one project over another, legislators should support a bill to speed the process up. But lawmakers should also recognize the threat posed by local regulators. For example, Lucinda Parker of the Clark County Health District’s Air Quality Division has said that she is “in no rush” to approve the eight proposed power plants within her jurisdiction. Earlier this month Las Vegas Sun reporter Launce Rake wrote that Parker’s “office will let the lights go off before approving a project that would compromise the county’s air quality.” Legislators can do very little about such demagoguery, but they should use the bully pulpit to condemn local officials who place radical environmentalism above the public good. Nevada’s lawmakers should also consider withholding state funding and removing authority from local agencies that erect unnecessary barriers to new power plants. (Since the proposed generation facilities will sell electricity to counties throughout Nevada, as well as other states, assertion of state authority over local control in this case is warranted.)
5. No Perks, No Penalties
Because power companies have been regulated monopolies for decades, politicians and bureaucrats are used to imposing their vision of the “right” way to organize the electricity industry. Government’s own misguided notions about how power markets should function, combined with lobbying by shortsighted activists and rent-seekers from the private sector, led to the high cost of electricity which sparked the initial calls for deregulation. But instead of learning the lessons of heavy-handed energy planning, many politicians in Nevada and across the nation see the California crisis as a reason to launch a new round of misguided meddling. Take the proposal to require all new power plants in Nevada to offer their electricity to the state first, as a hedge against merchant generators selling their product to a more lucrative market in California. Aside from the proposal’s shaky constitutionality—only the U.S. Congress has the authority to regulate interstate commerce—such a mandate would discourage plant construction. (Besides, limited transmission capacity would constrain efforts by new Nevada generators to ship most of their power outside the state.) Another destructive proposal would expand the requirement that Nevada power marketers support electricity from supposedly eco-friendly resources. The federal government has mandated this since 1978—and it’s one of the reasons why the cost of power is needlessly high today. Further mandates at the state level will be no more effective. The provision in Nevada’s deregulation law which requires electricity marketers to support renewable resources should be eliminated, not expanded. The best way to promote “green power” is to let consumers who want to help the wind, solar and geothermal industries pay more for such electricity. Tens of billions of taxpayer dollars have been spent to make green power economically viable, yet non-hydro renewable resources produce less than 1 percent of the nation’s electricity. Central planning hasn’t worked. It’s time to give the market a try.
In summary, mandates and sweetheart deals will warp the power market in the Silver State, and they should be wholly rejected by legislators. Nevada should not reward generators that produce politically correct power. Nevada should not penalize generators that sell their power out of state. The state should punish violations of environmental-protection laws, enforce contracts between buyers and sellers and leave the market free to do what it always does—increase options and reduce prices.
6. Stop the SNWA’s Power Grab
The Southern Nevada Water Authority (SNWA) has launched an effort to replace Nevada Power as the “provider of last resort” for Southern Nevadans who do not switch to an alternate seller once consumer choice arrives. The authority’s move is similar to those being made by ambitious officials of other municipal utilities, who see deregulation as an opportunity to expand their scope and influence. And the SNWA is not above using irresponsible rhetoric to accomplish its goal. Pat Mulroy, general manager of the authority, has said that deregulation is a “recipe for disaster” and that “Southern Nevada is no more than roadkill on the road to Southern California” for power companies. Legislators should not reward these kinds of statements. The SNWA’s drive to be a player in Clark County’s power market must be stopped. It guts the central principle of deregulation, which is to remove, not expand, government’s role in the power industry. Even worse, it poses a serious threat to private generators, who do not share the generous state and federal tax breaks and subsidies that municipal utilities enjoy. State Senator Ann O’Connell has the right idea about the role of public utilities in a deregulated environment. “Let’s keep the government out of it,” she recently told the Las Vegas Review-Journal.
7. Hold the Feds’ Feet to the Fire
The final step toward strengthening deregulation in Nevada is more rhetorical than legislative. Silver State officials should support the federal government’s position on the West’s power crisis. Specifically, Nevada should resist calls for a federal price cap on the sale of wholesale electricity in the region. This dangerous proposal, which the Federal Energy Regulatory Commission opposes, would stifle investment in power plants. Nevada should also make it clear that the state’s needs, as well as the region’s, require the federal government to do whatever it can to facilitate the building of transmission lines across federally controlled land. It’s clear that the new administration in Washington does not intend to ride to the rescue with ill-advised “solutions” to the West’s power woes. Given this posture, for Nevada to stand strong in support of deregulation is not only good policy, but good politics. The Silver State should also look to build a regional alliance in support of free-market electricity—a coalition of Western states that challenges the federal government to live up to its stated commitment to deregulation.
Nevada’s governor and lawmakers need to face a harsh but inescapable reality: No matter what changes are made to the state’s deregulation law, the price of electricity in the Silver State will rise in the short term. (Even if the state scraps its deregulation plan altogether, power will become more expensive.) California’s crisis, the Northwest’s drought, a fast-approaching summer and the national price spike in natural gas all mean that for the time being, the cost of generating and purchasing electricity will remain at record levels. One way or another, this cost will be passed along to consumers—either through rate hikes or tax revenue devoted to bailouts of ailing utilities.
For all the confusion over the West’s perplexing power market, the central question of the crisis is rather simple: What actions can government take to empower consumers, and thus lower the price of electricity in the long term? Clearly, a return to heavy-handed regulation is a step back to a narrow-minded time when the electricity industry was seen as a “natural monopoly” that would abuse customers if not for a “regulatory compact” overseen by power bureaucrats. True deregulation is the only tool that will bring stable, low prices to ratepayers in Nevada, the West and the nation. Freeing the electricity industry from well-intentioned but fundamentally misguided government control will surely be painful in the short run. But in the long run, it is the only way to escape skyrocketing power bills, bankrupt utilities and rolling blackouts. Full deregulation of Nevada’s power industry will bring lower electric bills, more choices for Nevada ratepayers and economic diversification for the Silver State.