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John G. Edwards

23 Percent Increase: Utility Pursues Rate Hike

18 January 2006

The skyrocketing price of natural gas will trigger a 23 percent increase in electric power rates in Southern Nevada this summer if state regulators approve a rate case filed by Nevada Power Co. on Tuesday.

Nevada Power Co. said a typical customer's year-round monthly bill will increase $30.62 to an average $158.50 by August if the Public Utilities Commission approves the company's $436 million rate request.

Nevada Power is proposing that rates be adjusted in two steps, with the first 14 percent rise taking effect in May. That part of the increase would reflect the forecasted cost of fuel and future power purchases. The second phase of the rate increase would be 9 percent in August when Nevada Power proposes to start recovering past expenditures for purchased power and fuel used in generating electricity.

Nevada Power declined to estimate how much the typical residential customer's summer bill would rise, but the Attorney General's Bureau of Consumer Protection office said a residential customer using 1,700 kilowatt hours would pay $25 more starting in May. Rates would rise another $15 per month in August. That would bring the typical summertime monthly bill to $212 by August, the bureau said.

The two-phase increase would boost the cost per kilowatt hour to 12.5 cents, up 2.5 cents from current rates, said Eric Witkoski, state consumer advocate and bureau chief.

The Public Utilities Commission has not set a date to consider the rate request.

If approved, the 23 percent rate increase will mean the average consumer using 1,250 kilowatts of power each month will be paying $891 a year more than he or she was in May 2000, an 88 percent increase in electricity rates since just before the Western energy crisis, when the average monthly bill was about $84.

"It's not a happy day for Nevada Power," said Michael Yackira, chief financial officer of the utility's parent, Sierra Pacific Resources.

"There's no profit associated with it (for the utility). Raising our customer rates and not affecting our profits is not a winning hand," he said.

The rate proposal will not affect the company's profits, because the increase would compensate Nevada Power for past and anticipated future out-of-pocket fuel and purchased power expenses.

Witkoski's office will study the rate increase to ensure the company's past power and fuel purchases were prudent, the consumer advocate said, but he does not expect a large disallowance like the utility faced as the Western energy crisis was ending in 2002.

"There's a lot tighter regulatory review now. So the increases mostly reflect the natural gas increases," Witkoski said. Also, the commission is reviewing Nevada Power's power and fuel purchasing strategies in advance, making a large disallowance less likely, he said.

On the positive side, Witkoski and Yackira are hoping that the first phase of the rate increase, the 14 percent increase slated for May, can be reduced if natural gas prices decrease.

Nevada Power will file a report with the commission in two months showing how much gas prices have climbed or fallen since the filing Tuesday.

But he second part of the increase is based on past expenses, and it will not change unless the commission finds an error in math or evidence of imprudent purchasing practices.

The cost of natural gas is driving rates higher, analysts say.

A year ago, the New York Mercantile Exchange was quoting a price of $8.80 for a million British thermal units of natural gas that would be delivered in February this year, an increase of 60 percent over the price a year ago for the same delivery date, Yackira said. The price soared to about $13 last fall; it was quoted at $5.50 a year ago in the fall.

Nevada Power uses natural gas to generate 75 percent of the electricity from its own power plants, and more than half of the power it buys on the wholesale market is controlled by natural gas prices, Yackira said.

The utility locks up natural gas prices several months in advance but does not think it's wise to lock up rates too far in the future.

"When prices are at an historical high level, it is not a good time to lock in prices at that level," Yackira said.

The futures markets, which speculators use to make bets on the prices of commodities including natural gas, are predicting that natural gas prices will decline over the longer term, he said.

In the past, the utilities commission has spread out big rate increases over three years to reduce the immediate effect on customers, but Nevada Power is proposing that it recover the past expenses in one year.

The commission has expressed a desire to stop the practice of spreading out rate increases for longer than a year, Yackira said, because the company gets to recover interest on unpaid balances from customers.

Also, raising rates to reflect costs, rather than delaying the recovery, gives customers a price signal, he said.

"Setting the right price or setting the price correctly allows customers to make choices," he said.

Consumers might reduce their bill by setting the thermostat for the air conditioner at a higher temperature in the summer.

Turning off the lights and appliances, "all these things your mother taught you, we keep preaching," said Donald "Pat" Shalmy, president of Nevada Power.

Customers worried about being hit with big bills can opt for level bills, which are reset once yearly, executives said. Qualifying low-income residents can get financial help from the state Welfare Division or Project Reach, a charitable program that is part of United Way.

To reduce the likelihood of future rate spikes, Nevada Power proposes to build a large coal-fired plant near Ely. That would reduce the utility's reliance on natural gas, but the first coal-fired unit would not start generating power until 2011.

Also, Yackira is looking to the federal government for new energy programs. "We need a domestic national energy policy that focuses on (native) resources, mainly coal which is abundant in the United States, and we just don't use enough of it," he said.

John G. Edwards
John G. Edwards