Digging into Question Three

Confused about Question 3? That makes about 3 million of us.

Even among the politically informed, what may result from the passing of Question 3 seems unclear.

Is it the right or wrong thing to do?

Big money

Both the For and Against campaigns are spending big money to get you on their side.

So far this year, the No on Question 3 PAC — known as the Coalition to Defeat Question 3 — has raised over $63.1 million.

All but $12,000 of that sum came from NV Energy, according to the Contributions and Expenditures reports filed with the Secretary of State.

The group supporting the ballot question, “Nevadans for Affordable, Clean Energy Choices,” this year raised $32.9 million — $22 million of which came from Las Vegas Sands Corp.

Sands owner Sheldon Adelson had considered leaving NV Energy, as other large casinos have done, but decided not to pay the $23.9 million exit fee asked by the monopoly utility.

Adelson’s net worth as of 2018 was estimated at $35 billion, while that of Warren Buffet — owner of Berkshire Hathaway, which purchased NV Energy in 2013 —was, two years ago, put at $87 billion.

Arguments Pro & Con

Those in opposition have claimed that the passage of this measure will result in higher energy costs and rolling black- or brown-outs. They have also claimed that this is not the sort of thing that should be in a constitution, and that putting it there would cement the results for several years due to the process by which the state constitution can be amended.

Devlin Daneshforouz, outreach director at the Coalition to Defeat Question 3 and a former staffer at the Democratic National Committee, as well as a project manager for former Senate Democratic Leader Harry Reid, asserts that the proposed amendment is just too vague, and that passing it would be too risky for Nevadans.

Proponents, on the other hand — such as Sam Castor, executive vice president and deputy general counsel for policy at Switch, Ltd. — deny such claims.

Castor freely admits that we don’t know exactly what will happen if the ballot measure passes — other than that we will then have more work to do: crafting legislation to establish a well-functioning and competitive energy market.

Currently, he says, NV Energy’s monopoly allows it to overcharge Nevadans by massive amounts and then use those profits to further cement its monopoly in place through massive political spending.

However, if that “well-functioning and competitive energy market” is established by good legislation, says Castor, competition within a free market will bring rates down significantly.

Role of the state legislature

Essentially, all the proposed constitutional amendment would do is make the Nevada Legislature responsible for crafting a new state regulatory structure.

Lawmakers would be under a mandate to pass legislation within the next four years establishing a framework in which different energy firms could compete for customers’ business.

That framework, however, would also have to ensure “meaningful choice” among retail providers for consumers and reliable and competitively priced services.

A key provision would insert protection for the right of individuals to produce electricity for themselves in the constitution. Also, many of the concerns opponents have voiced, such as possible service disconnections and unfair practices, are protected against in the ballot measure’s language.

Based on the pro and con positions stated above, one could easily make an argument for voting either way.

Yes, change has risks — as does remaining within an arguably exploitive monopoly-dominated status quo. It’s also true that the results of Question 3 passing are vague at this point, since Nevada’s future energy regulatory structure would not be defined until lawmakers complete their task.

With those preliminaries out of the way, however, a deeper dive into the controversy becomes increasingly illuminating.

The Constitution issue

Some opposition to Question 3 stems from the fact it changes the state constitution.

Nevada State Controller Ron Knecht asserts that, “Question 3 is exactly the kind of thing that does not belong in any government constitution. It’s highly technical and specific.”

It’s certainly specific — stating exactly the new section to be added to the constitution — but is it “highly technical”?

Perhaps “technicality” is in the eye of the beholder. Judge for yourself. The full four paragraphs of the Energy Choice Initiative passed by voters in 2016 is on the Secretary of State’s website and can be read here.

Tick Segerblom, a veteran legislator and candidate for Clark County Commission, also expressed the same concern as Knecht. Constitutions serve particular purposes, he noted. This includes outlining the structure of a government and setting forth the rights of its citizens.

On that last point, it seems that the wording of the amendment might actually meet that challenge — since its second paragraph establishes that “every person …

has the right to choose the provider of its electric utility service, including but not limited to, selecting providers from a competitive retail electric market, or by producing electricity for themselves or in association with others, and shall not be forced to purchase energy from one provider. Nothing herein shall be construed as limiting such persons’ or entities’ rights to sell, trade or otherwise dispose of electricity.

Perhaps this is a good debate for legal scholars. Does the four-paragraph size and supposedly technical nature of the amendment preclude it from being a simple establishment of a right for citizens?

However, Ian Bartrum, a constitutional scholar and law professor at Boyd Law School, doesn’t put much weight behind the doesn’t-belong-in-a-constitution argument.

States put all kinds of things into their constitutions, he says, so this wasn’t really an issue. His opposition is simpler: Question 3, he asserts, is bad policy.

Bartrum fears that passage will trigger extensive litigation from interests out to impact the shape of the new marketplace. He fears that energy co-ops that currently negotiate good rates for rural areas may lose customer-members to new competitors and have to spread their remaining costs onto an ever-smaller member base.

In Boulder City, for example, residents buy power from the co-op owned by Boulder City. This puts the interests of the co-op in line with the interests of its customers, not separate shareholders or investors.

NV Energy and the Public Utilities Commission used a similar argument to justify charging tens of millions of dollars to large customers who wanted to leave the utility and buy their power elsewhere.

Bartrum’s unique lawyerly twist to the argument is an allegation that, while the new law would let individuals leave NV Energy, the Contract Clause in the U.S. Constitution would prevent co-ops and similar organizations from doing so.

“The relevant issue,” he asserts, “is the new individual constitutional right to a ‘minimally regulated’ market. Any individual could sue to challenge any new regulation. The Legislature or PUC [state Public Utilities Commission] can set up whatever they want, but it will always be subject to anybody’s challenge.

“Maybe that won’t happen, but you know it probably will,” he continues. “True enough, the Court could approve of a given setup. But it would have to approve every new variation. And it’s simply not a good judicial question.”

Bartrum has taken a public stance against Question 3 and is featured in an ad paid for by the No on 3 campaign.

Sam Castor on Co-ops

Sam Castor, the Switch executive, responded to Bartrum’s argument, saying he found it interesting, but turns the professor’s take regarding co-ops on its head — seeing a big future for co-ops once Nevadans have a free market in retail electricity.

He even calls the co-op model the “iconic solution” to good energy markets.

“I have met with all the co-ops,” he told Nevada Journal, “and I explained to them how we think they represent the best model for energy markets, [since] the customers are also the owners.”

When organizations charged with purchasing power are owned by those who consume the power, said Castor, those organizations have powerful incentives to keep the communities’ best interests front and center.

The state of Nevada, he thinks, is uniquely positioned to be the biggest producer of solar energy in the country. “Nevada should be selling energy to other states, not buying it,” he insists.

Consistent with that vision, Switch already has invested in land and plans for partnering with other organizations that would use the land for generating huge amounts of solar energy. The infrastructure is already in place, says Castor, and already in use.

Today, according to the federal government, most of Nevada’s energy by far — 88 percent, says the Energy Information Administration — comes from outside the state.

That would obviously change.

Anxiety-producing California

Opponents of a freed-up retail-electricity marketplace in Nevada regularly cite California’s energy-regulation blunder in the early 2000s. However, the insider-crafted legislation that disengaged and negligent California politicians passed had explicitly rejected a free-market approach.

The basic plan had been drafted by the California Public Utilities Commission in 1993 and 1994. Contrary to the proposal behind the Nevada ballot’s Question 3, the California PUC’s scheme sought to tilt that state’s regulatory framework in favor of large users and utilities, while freezing customer rates at artificially high levels so utilities could recover their bad investments — approved, of course, by the PUC — in costly plants.

Thus the ultimate legislation that Sacramento legislators approved in 1996 set up regulated organizations for market manipulation and exploitation by organizations such as Enron.

As the San Francisco Chronicle reported at the end of 2000,

The utilities sought to have the terms codified in law, and in early 1996, a number of bills were introduced in the Legislature to do so.

Some observers say that what happened next contributed to the overall plan’s flaws. Months passed while the discussion meandered and faltered, and at one point it even appeared that no law would be passed.

That’s when state Sen. Steve Peace took the reins and tried to make something happen.

The San Diego legislator already had won the respect of his colleagues for his work on another complex piece of legislation, reform of the workers’ compensation system.

During a hurried two-week conference in August — dubbed the “Steve Peace death march” for his propensity to keep negotiators at the table late into the night — the fine points of the energy law were hashed out.

Legislators entrusted their judgment to Peace and the few colleagues who worked on the bill. There was an abiding sense by a number of participants that few members of either house knew what was in the bill or even understood it. It was passed by both houses of the Legislature unanimously and signed into law the following month. (Emphasis added.)

“People were grateful to Peace and (former Sen. Diane) Martinez for taking it on,” said Debra Bowen, D-Los Angeles, the current chair of the Senate energy committee. “Historically, utilities were a pretty boring topic, and I think term limits factored into it.”

The law was to end the monopolistic control that utilities held over both power production and supply by requiring them to sell off their generators. It set rates artificially high so they could recover money from bad investments. And it gave them nearly two years to prepare for competition.

Wikipedia, in its article “California electricity crisis,” notes that although the state had an installed generating capacity of 45 gigawatts at the time of the blackouts, demand was much lower, at around 28 gigawatts.

Nevertheless, although normally such low demand would push prices way down, the regulatory framework Sacramento had imposed opened the door for extreme market-manipulation tactics. Gleeful traders compared notes on tactics with nicknames such as “Death Star,” “Black Widow” and “Get Shorty.”

An investigation by the Federal Energy Regulatory Commission concluded that many of the actions leading to the crisis had been illegal. Eventually FERC concluded that a poorly designed mixture of regulation and deregulation in different parts of the market incentivized companies to buy energy at capped prices and sell it at higher prices out of state. Similarly, they could schedule energy transmissions in ways that would o artificially create periods of excess demand and thus hike prices.

Even without the so-called “deregulation,” however, a report from the Public Policy Institute of California argues, blackouts had been on the way. Increases in natural gas prices and drought in certain areas meant supply shortages were looming, even if no bill had been passed.

Anxiety and ‘average’ costs

Another disturbing message coming at us is that, in states that have deregulated, average costs are all over the place. Montana costs are lower than ours currently, by less than a cent. Colorado costs are higher than ours, but again only by less than a cent. Florida was less than a cent under our costs this year and less than cent over our costs last year. Texas is about even with us on average costs as well.

But are “average costs” even the numbers we should be looking at? After all, when you have options, you don’t have to choose the average cost.

Consider Texas: Consumers there — in a market model that Yes on 3 advocates point to — can now choose among all kinds of plans, finding those that fit their situation best.

Curious about how the issue looks to actual people living in the Lone Star State, this reporter called up a relative and long-time Texas resident: Marcos Felder — retired after a long career in both nuclear and petroleum energy industries.

A success story from Texas?

Now, during the summer, his bills hardly get up to $100 a month, he said. “That was quite a change for me,” he adds.

Felder has one home he calls “the old house,” which is empty, but where the air conditioner runs continuously during the summer. Yet that bill now comes to only about $25 a month nowadays, he says, adding, “Water is more expensive than power now.”

He says that, using the ChooseTexasPower website, it is very easy to switch and pick the contracts with the exact terms you want.

“I buy yearly contracts,” explains Felder. “There are not only options for different providers, but for different types of energy and for different contract terms and lengths as well. People can choose between energy created with wind, solar, or gas and other options.”

Not surprisingly, perhaps, natural gas is the most popular choice in Texas, which is one of that resource’s top producers worldwide. However, as the ChooseTexasPower website shows, in many zip codes providers offer over 40 options. In most of the state — covering almost 90 percent of the residents — options are plentiful.

You can pick an option that’s as low as $.05 per kilowatt hour, or if you want to help renewable providers, you can do pay a little more.

In Texas, as in Pennsylvania, customers can switch providers in as few as three business days.

NV Energy’s current sweet deal

One of the arguments made by the Yes on 3 folks is that energy pricing in Nevada is screwed up — set by law to guarantee hefty profits to NV Energy, no matter how wasteful the monopoly gets.

And it’s true that the Public Utility Commission sets the rates that NV Energy charges us all by using a formula partially based on the company’s costs — meaning the higher go the costs, the more NV Energy’s shareholders can receive.

This would seem to incentivize inefficiency: Since profits are a function of costs, NV Energy need only increase costs to increase profits — rather than, like other businesses, produce more and superior products, provide better services, or prune back overspending.

NV Energy’s inefficiency also appears to be empirically illuminated by the eagerness large Las Vegas casinos and other firms have demonstrated to get out from under the monopoly.

The PUC this decade has demanded and received exit fees — termed “704B impact fees” — now running into the hundreds of millions of dollars.

However, companies’ willingness to bear such exit costs is highly significant. It strongly suggests they’ve calculated that what they can save by purchasing energy themselves on the wholesale market will more than make up the difference.

‘Over-earning’ by millions?

One expert witness who testified before the PUC was Brad Mullins, an attorney and accountant representing a western-states business nonprofit, the Smart Energy Alliance, whose members include Microsoft, Intel, Shell Oil and Boeing — as well as Switch.

“I understand the original calculation of the 704B impact fees occurred in a ‘black box’ without all parties having access to the underlying models that developed these impact fees,” Mullins told commissioners.

“In short, there was no transparency,” he said. “This lack of transparency in the 704B allocations and its process significantly undermines the Commission’s ability to accurately inspect, understand, and adjudicate how these fees ultimately relate to the impact of departing customers on the system.”

At one point in October 2017, Mullins was asked if he had any comments.

“Yes,” he testified, using NV Energy’s old name: “Nevada Power’s quarterly compliance filings … demonstrate that [the company] has been severely overearning since its last rate case, most recently by nearly 300 basis points. That is the equivalent of collecting approximately $120,576,722 more from customers than Nevada Power needs to operate its system and earn a fair return.”

In effect, Mullins was presenting a prima facie case that NV Energy is pulling in extra millions simply because it has achieved regulatory capture of Nevada’s Public Utility Commission.

Surprisingly, a February report from the U.S. Energy Information Administration lends credence to that case. Despite many claims that Nevada has some of the cheapest retail electric rates in the nation, the report shows the state is actually in the middle of the pack and has been growing more expensive over the last three years.

Nevada ranked 20th in 2016, 24th in 2017 and, as of February, 33rd. When compared only to other western states, Nevada’s rates are actually some of the highest. This comparison may be more relevant given that eastern states have such vast differences in their energy market structures, climate, state of hardware and facilities, and general economic profiles.

Residents of New Mexico, Arizona, Washington, Utah, Montana, Idaho, Wyoming, and Oregon all pay less than do Nevadans.

In part this is because there’s an active and robust national energy grid and market already in place. For Nevada consumers, therefore, switching would not require huge changes in infrastructure.

Indeed, Sam Castor of Switch says that after that firm won its lawsuit to leave NV Energy, in the very first month Switch was able to quickly begin purchasing power from other producers and saved $2,000,000 that month alone.

Take-aways

Recent polls suggest that Question 3 is likely to fail. Although it passed with over 70 percent approval in the 2016 vote, this year’s record spending was not present.

Even if the measure should pass, however, it seems reasonable to expect the fight to go on — in the Nevada Legislature and in the courts.

Nevertheless, certain things should by now be clear to Nevadans. Our current regulations put up big road blocks (e.g., tens of millions of dollars in exit fees) for organizations attempting to get a better deal, or for individuals who want options when making their energy decisions.

We also know that Nevada has a whole lot of undeveloped land, and the perhaps best climate in the U.S., for solar generation.

Given all the ground this report has covered, it’s difficult to see good grounds for either significant pessimism or optimism. And if you’re looking for grounds on which to base your vote, the only conclusion that would seem reasonable is to go back to first principles: Do you think we’ll do better with our government-protected monopoly, or a freer marketplace?