Nevada’s utilities are facing increased pressure in both the financial and competitive realms due to the economy and the emergence of alternative energy in the state. While the lower price of natural gas has certainly helped, Nevada’s utilities are finding that customer’s expectations are far different than the realities they are facing. Recently, executives representing Nevada’s utilities met at the law offices of Holland & Hart in Las Vegas to discuss some of the issues each of them face.
Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues pertinent to their organizations. Following is a condensed version of the roundtable discussion.
How have your organizations been affected by the economy?
Jeff Shaw, Southwest Gas: We’ve had tremendous growth, especially during the 90’s and early 2000’s. That growth has come to a screeching halt. Mostly towards the latter part of 2007, into 2008 and clearly last year. We have, of course, disclosed those changes in our annual reports to shareholders and to the commissions that we work with. One of the interesting things about our business is over time, people have naturally used less and less natural gas. In fact, if you look at our industry, we have seen a 20-year history of declining average usage by customers. The reasons for that would be better housing envelopes and replacement of appliances with more energy-efficient appliances. Unlike the electric utility which has every appliance known to man that keeps getting added, we don’t. We have your basic appliances, cooking, clothes drying, space heating, hot water and maybe a pool heater or a barbecue. Because of the number of foreclosures and short sales, we are seeing a larger number of inactive reads. That being said, the price of houses has declined and, as a result, we are starting to see more homes selling. The question is: Are they going to be inhabited or is it just an investor that has purchased the home? We will have to see how that all plays out. It is impacting our business though. We are seeing a lower margin as a result of not having customers in those homes. We will go to great lengths to make payment arrangements to keep the customer in the home.
Michael Yackira, NV Energy: We are experiencing the same thing. Normally, we have about 4 percent of the homes we would consider to be inactive meters. What we mean by that is it is primarily second homes. Right now, it’s about 7 percent, so it has gone up. It might not have gone up as dramatically as some people think. The rest of the homes, the 93 percent of the homes, are using less energy and we assume that has been affected by the economy.
Pat Mulroy, Southern Nevada Water Authority: The biggest challenge is having to go through a drought during the worst economic times in the world. No water, no money, it’s not a good situation. When we talk about how much less water people are using, we know it is a function of both the down economy and conservation, and we won’t be able to disaggregate how much of this is the economy until we start coming out of it at the other end. The net effects of that has plummeted water sales. We are down another 7 percent in this fiscal year. Connection charges have all but disappeared and we are dealing with foreclosures left and right. We are giving our customers every payment stretch opportunity we possibly can. If they have a leak, we have a meet-them-halfway program. We are giving people payment plans and options and stretching out their payments as best we can.
How effective are conservation efforts?
Shaw: We have programs to encourage conservation. What we have striven for is a rate design that does not punish us for encouraging conservation. If you think about it, if your rates are determined based upon the volume of gas that flows through the pipe, if your usage is declining, that alone can drive you in for a rate case because you are not getting as much margin because the volume is going down. What we have advocated for is a decoupled rate structure along with programs that we are willing to do to encourage conservation. The biggest portion of your bill on a per unit basis is the cost of natural gas. We want to encourage you to use less of that, at the same time being able to have some mechanism in place through rate design that allows us to recover the cost of operations which are largely fixed. It’s similar to cable or garbage. I can put my garbage out twice a week or I can put it out once a week, but the infrastructure of that truck coming around twice a week is still there whether I do it or not and the cost they bear is still there. Similarly, if I use a lot of gas or a little gas, the cost of that infrastructure is still in place and doesn’t vary. That’s the general idea we are trying to convey. In the last general rate case in Nevada, we received a decoupled rate structure. Now we are in a position to aggressively encourage conservation to help customers use less gas and we are protected so we are not going to hurt financially. You never want to be in a position where you have a conflict.
Yackira: As a whole, over the past five years, the industry has been more focused on conservation. There wasn’t a really big push when electric prices were low and there were mechanisms in place to provide incentives for companies to reduce consumption. There are very few businesses that would say, we want you to use less of our product. There has to be an incentive mechanism in place to provide that alignment of what the customer deserves in terms of lower bills and what the shareholder deserves in terms of the investment they have made. We have had good success in our conservation program. Last year, for example, we reduced consumption by about 1.4 percent of total energy demand. We are really ahead. The average is about a half of a percent or less in the nation. I don’t want to pat ourselves on the back, but with the support of the Public Utilities Commission (PUC) and the way we have jointly worked on this together, it’s a real opportunity for our customers. In 2002, our company invested $2 million annually in energy conservation. In the past two years, we’ve invested $60 million a year. It has become more important to us. If you look at what our energy strategy is, the first piece of that strategy is energy conservation because what is good for the environment is good for our customers. It means we don’t have to build as many power plants.
Mulroy: When we talk about how much less water people are using, we know it is a function of both the down economy and conservation and we won’t be able to disaggregate how much of this is conservation and how much is the economy. The net effects of that has plummeted water sales. We are down another 7 percent in this fiscal year.
Yackira: They have done an incredible job, I don’t think there is anybody else in the nation that compares to what the Las Vegas Valley Water District has done in conservation.
Mulroy: Much to my finance director’s chagrin. You talk to anyone in the country, when it comes to climate change, we are at ground zero. We are the driest desert in the United States, we are completely landlocked, we have no ocean in our territory, we have no agricultural buffer that you can buy water rights from and transfer to urban use. We are ground zero on a river system that has been really stressed. But, there are solutions.
What role does the Public Utilities Commission play in conservation?
Anne-Marie Cuneo, Public Utilities Commission: When a regulated utility, either Southwest Gas, NV Energy or a small water company has a conservation program they would like to put into place, there is not a financial incentive to do that. They are saying, please don’t buy my products. There needs to be some recognition of that. So, they will file an application with the PUC and we have a whole team of economists and CPA’s and financial analysts, engineers who will look through the plan, make recommendations and changes, and eventually, the Commission will approve what they think is reasonable to accomplish a given goal. We’ve worked really hard to create an effective demand-sized management program with NV Energy. We’ve been working on this for years in little increments and we will tweak programs as they go, but it’s a long-term approach. You have to be willing to sacrifice in the short-term in order to get the long-term goal. It’s really hard to do that sometimes, but you have to be willing to look for and see that there is a light at the end of the tunnel and this is what you are headed towards.
What effect does renewable energy have on your companies?
Yackira: It’s clear that renewable energy is not just a passing fad. I think with additional investment in renewable technologies, prices are going to come down. We were one of the first states in the nation to recognize the importance of renewable energy. As a company, we recognized it well before it was required by law. In 1986, my company entered into its first contract with geothermal power in Northern Nevada. Before it was a statute, before it was vogue, we realized the importance of renewable energy in the mix of the generation of energy products that we have. I don’t see that as a threat, necessarily. In fact, I see it as an opportunity for us. I think that what I would not want to happen is that there be a middleman between us and our customers. If the customer’s desire is to have solar or wind energy, we can be the providers for that for our customers. There are a lot of things we are thinking about that could position us well with our customers so they see us as the provider of any form of energy that they like. If they want wind power, solar power, plain ol’ normal generation or reduced consumption, we will provide them choice through different bundles of products we offer so they know they have control of their bill and their energy use. I say that in a grand sense. I don’t mean that as dramatically as it sounds because so much of the cost of electricity has to do with things that we don’t control, namely the price of fuel. If natural gas becomes less abundant, the price of natural gas goes up, the price of electricity goes up. We make no more money and our customers are really upset. That’s a bad place to be.
Shaw: One of the things that I think everybody needs to understand is that you have renewable portfolio standards that are being discussed and they are fine. But, the reality is, when you take a look at the energy consumption in this country, you can’t go to the levels that are being discussed pragmatically. Natural gas is going to have to be a significant part of the equation, very significant. You can’t, with renewable energy, make a big enough dent in this country to do what people expect. I’m glad to hear that the costs are coming down, but I have seen data that has shown if you consider the amount of coal energy that is being generated in the country and you see the amount of natural gas energy that is being generated in this industry, it’s not possible to get easily by these standards that are being battered about by politicians. You really need to talk to the people who are in the industry, because natural gas is going to play a big role. Fortunately, as long as there are no new Federal laws introduced that would restrict the production of natural gas, you have a long-term supply to bridge you to whatever alternative energy source there may be. I think people need to understand, we place a huge demand on energy in this country and to all of a sudden go completely to renewable generation to provide for that demand is not practical, it can’t happen.
Does Nevada have the potential to be the alternative energy capital of the United States?
Cuneo: There is a lot of enthusiasm, and I appreciate that. But, the fact of the matter is, there is a lot of work that goes into developing and creating an industry and that is what they are trying to do. There is a lot of competing interests in the renewable industry. We are making some progress. There is a lot of work to be done, but, for those that think it is a rush to the West, get rich scheme, it is not necessarily.
Yackira: I think Nevada has on a per capita basis more renewable potential than any state in the United States. But some people think solar power is free because the sun is free. Well, we have two problems with that. One is the capital associated with capturing that sunlight and either creating it directly into electricity through those panels that are on roofs or concentrating sunlight using mirrors. But, when the sun is not shining, the lights still have to be on.
Shaw: That’s where we step in and provide natural gas. Natural gas will need to be a backup in a lot of these renewable projects. You have to have a backup because the sun doesn’t always shine and the wind doesn’t always blow, but people always expect power.
Yackira: In Las Vegas in the nighttime, when it is 90 degrees, you have to something other than renewable energy to provide that electricity. There could be a breakthrough in storage technology. That is possible, which would make these forms of renewable energy more 24/7 like a normal power plant, but that comes with a cost. We are going to be testing that. We just filed something with the PUC asking for approval of 100 megawatts, which is a very large scale test of this. The test will be to see if you can have a power plant that uses solar as its fuel medium. As the sun starts degrading, about four o’clock in the afternoon, the efficiency of the plants go down. You could have stored capacity continuing through the peak hours. That would be obviously very beneficial in terms of making solar more 24/7.
Cuneo: Even that plant, it only extends it a couple hours, right?
Yackira: It will extend it to probably about eight or nine o’clock at night.
Cuneo: Which is about two hours past when your output really drops. You are only getting two hours worth of electricity that you didn’t have.
Shaw: Then there is the issue of where your population center is and where you are going to be generating the energy. You have to transmit, not just store that energy. It’s going to be a big issue for the large population centers in the country. That’s why coal plants are so prevalent back east. How do you get enough renewably-generated electricity to the places you need them will be a real interesting challenge to address.
Cuneo: Nevada has the luxury of having a lot of geothermals, but it doesn’t happen to be located where our population center is. It’s located in the Northern part of the state and the population center is in the South. So, NV Energy has proposed a transmission line to help bring some of those renewable from North to South in order to fulfill their renewable portfolio standards.
Shaw: It takes a lot of land to generate enough solar to replace one of the plants that it uses right now here in this valley to run the electricity needs of Las Vegas.
Yackira: The rule of thumb is about ten acres for one megawatt.
Cuneo: A megawatt would account for about 1,000 homes in the North and 600 homes in the South.
How has lower natural gas prices affected this industry?
Shaw: The good news is gas prices have come down. The bad news is getting natural gas is one of the most volatile commodities there is. It doesn’t only impact our company, it impacts the electric company in a huge way as well.
Cuneo: Although, that is a plus for the recession. Since usage is down, the supply is going to remain more stable and therefore, the volatility should defuse a little. There is always a silver lining, right?
Yackira: Certainly in terms of our businesses, that is a huge help. This is good news for our customers and hopefully, it will be good news in the long run as well. If you’re looking at the overall economy of the nation where there has been demand destruction that will never come back, chemical plants that now go overseas because the price of natural gas was too high and labor was too and if you add it all up, it is cheaper to go overseas. That will never come back.
What can customers expect in the next year as it relates to the cost of utilities?
Yackira: The cost of electricity is going to come down because natural gas prices are down. The way we have financially hedged our gas purchases, we do it over a period of time. So, as the price is going up, you are not seeing that price rate as rapidly. If the price is coming down, you won’t see that price decline as rapidly. If the price [of natural gas] stays about where it is, then the price of electricity will be coming down. We filed for four consecutive rate declines in Northern Nevada.
Shaw: The last rate decision was reached in October [2009] and the new rates became effective November 1st. That was after five years of being out of any rate case and the rate on increase was far less than the rate of inflation during those five years. We were able to point to a number of cost control measures that we can do in order to keep that rate increase as small as possible. There is a price at which people will produce and a price in which they won’t. Generally speaking, rate cases happen anywhere between three and five years, depending on the external factors. Similar to NV Energy, we buy our gas at a 50 percent hedge and 50 percent floating. We’ve found that over time, you can show any chart you want to in terms of the price of natural gas and we are in the middle. We dampened the volatility. We can’t time the market any more than you and I can buy a stock and try to time it. You really want a dollar cost average and you want to fix some and float some so you can take advantage of both situations. It has worked extremely well for us, but we make no money on the cost of natural gas and there is the bigger component of the cost of energy that customer pays.
Mulroy: We try very hard to make our increases very small and step into them. The board just approved a two-year rate increase. We have a capital fund that is funded by three components, the regional connection charge, a regional water rate and the quarter cent sales tax. The regional connection charge went from an annual collection of $188 million a year to $14 million in a twelve-month period. It just fell off the cliff. Because of the success of conservation, the water use has gone down, so water revenues are down. The irony here is that despite the dip in sales tax revenues, it is our most stable revenue source right now. They have raised the regional water rate by a dime this year and then in January of 2011, it will go up another ten cents per thousand. The water district also raised the service charge, in order to stabilize its declining revenues. We needed something that was stable revenue that wasn’t tied to consumption in order to offset the effects of conservation. We don’t have that commodity cost. The resource itself has no cost to it. That changes instantly when you deal with desalted water, ocean water. There, your capital costs pales to your annual operating costs and it is an enormous power consumer. Your operation costs are driven extremely by power consumption. There are those that have suggested that instead of building the intake project, we build a desalter and then deliver it over land to Southern Nevada because Lake Mead will have dropped to a point where you can’t exchange anything. We did a cost estimate of what that would cost. The power bill alone is $400 million a year. So, it becomes extremely uneconomical.
Cuneo: When we design rates, we try to put as much of your fixed cost component in the fixed cost component of the rates. We try to put fixed cost as fixed cost, variable cost as variable cost. But, customers have a hard time understanding that it really costs $36 just to have the ability to buy power. It’s hard to swallow.
Mulroy: For us, it’s different. The board made a decision in the mid-90’s to take all of those fixed costs in order to promote conservation and load them into the commodity charge in four tiers. So, the person who actually pays for their cost of service is buying at the third tier. The second and first tier are fully subsidized by the fourth tier. In order to start uncoupling that, we are raising the service charge by a minimal $2 because we knew it was a rough economy.
Will we no longer be able to use Lake Mead as a water resource in the near future?
Mulroy: That’s like asking me to predict the weather. I have been pounding on the Bureau of Reclamation saying I’m really sick and tired of probabilities. To me, it’s like placing bets on the Super Bowl, taking odds. I think there is a fundamental shift in climate that is happening. For us, it’s an adaptation issue. We really have to assume that the worst is possible. If we were simply to continue on our hydrology of about 68 percent normal runoff, then we will lose our upper intake by the end of 2012, beginning of 2013. We will be around 1,025 ft, which is that critical elevation in Lake Mead by 2013 or 2014. You have to remember, Lake Mead is a V, the further you go down, the faster the rate of decline is. That’s why we are pushing with everything we have to keep that in-state project in our resource plan and have it permitted and approved, sitting on a shelf where we can go to design and construction the minute we need it because we don’t know. It’s completely unknown to us. The challenge is having to react to conditions. Ten years ago, we never would have assumed we would be building a third intake [at Lake Mead]. That just fell in our laps out of nowhere. That is not predicated on growth. That is not predicated on the economy. That is predicated on dwindling supplies. When you take that and you lop it onto an already aggressive capital plan, it becomes very difficult to manage. We as a people react to water differently than we react to any other resource. You can mine the gold, take the gas, take the oil, sell it, ship, do whatever you want with it. Touch that water supply and we go crazy. We go absolutely crazy.
