It’s nearly impossible to talk about Nevada’s future without addressing three potential sore spots: water, gas and electricity. During the last several years, an estimated 60,000 people have moved to the state every year, contributing to its current estimated population of nearly 2.3 million, according to the Nevada demographer’s office. The population boom has placed significant pressure on the state’s utilities to produce and deliver much more power, water and natural gas. Just last year, for example, Nevada Power installed 40,000 new meters, while Southwest Gas Corp. added 67,000 new customer accounts.
The problems confronting Nevada’s utilities boil down to basic economics. Demand is exceeding supply. As a result, utilities are being squeezed on all sides as natural resources become scarcer, prices rise and the population continues to soar without any end in sight.
Mixed Bag
By far, the biggest challenge for utilities is to achieve and maintain financial stability, said Don Soderberg, chairman of the Public Utilities Commission (PUC) in Carson City. He said financial markets are now more skeptical about investing in utilities. He believes it’s an over-reaction to the western energy crisis that occurred several years ago, which caused Nevada Power’s credit rating to plummet below investment grade.
Over the past decade, natural gas has also become the fuel of choice for electric power plants, which has steadily boosted the commodity’s price. “The natural gas industry has publicly said it can’t meet the nation’s needs right now,” said Soderberg. “We want natural gas because it’s clean, but we don’t want to drill for it. If we’re not willing to change our habits, in the end we’re going to have to start looking at other ways to generate power.”
Realistic alternatives include coal, which Soderberg said is abundant throughout the country. One coal facility is being built north of Reno by Sempra Energy, based in San Diego, and another near Ely is being developed by L& S Electric, based in Wausau, Wis.
Likewise, wind power is being developed at a significant rate nationwide. But wind is inconsistent in Nevada, especially during the day, making it less attractive as a power source. Some companies in Northern Nevada are experimenting with geothermal energy, which uses the heat in underground water to generate electricity. Research is also being conducted with less popular renewables that can generate electricity, such as waste gases from livestock on farms and garbage dumps, and small hydros – generators that are placed on bodies of moving water.
Yet, the state’s most abundant and consistent energy source – solar – is still out of reach. The problem is the technology behind it. Not only is it expensive, but its track record has been very spotty. What’s more, added Soderberg, the public won’t tolerate higher electric rates to fund solar technology development.
“Solar is a very expensive method to produce electricity, even in a sun-plentiful state like Nevada,” explained Michael Yackira, executive vice president and chief financial officer at Nevada Power in Las Vegas. “The cost of a kilowatt hour of production from a solar plant is about four times that of a natural-gas-fired power plant.”
The utility, which services 760,000 customer accounts, produces about 40 percent of its power and imports the rest over transmission lines from power producers such as Reliant Energy. Recently, it’s received approval from the PUC to build two new power plants in Southern Nevada, which will accommodate the estimated power needs of the state’s residents two years from now and also help meet peak needs during the hottest days of the year.
By generating more of its own power, Yackira said the utility can better control prices. However, because natural gas fuels its plants, consumers will still be exposed to the volatility of natural gas prices, which have been significantly higher during the past six months.
Meanwhile, Nevada Power has refinanced some of its debt at lower interest rates, a strong sign that credit markets are reconsidering the company as a stable investment opportunity. It’s also diversified its portfolio, which now includes more coal plants, which offer a flatter price point.
Yackira told the story of how the company landed in financial trouble during the western energy crisis. He said it followed the advice of government entities like the Federal Energy Regulatory Commission, which suggested that utilities experiencing a shortage of power lock in long-term contracts to avoid paying higher prices later on. But price caps were soon set at lower rates and the utility was stuck paying high, long-term rates. To make matters worse, the PUC blamed the utility’s financial woes on “poor management” and refused to pass a rate hike to help offset the cost. The utility has since filed a lawsuit against the PUC, which is still pending.
“Having a financially strong utility is an imperative, especially with [strong] growth,” said Yackira. “We still have to make strides in our financial strength in order to get back to investment grade. It will take us a few years to get there – maybe as long as 2007.”
Environment vs. Demand
Over the last few years, the supply of natural gas has considerably tightened. The average growth of natural gas customers in the state has averaged about 5 percent each year, more than twice as much as the industry’s average of 2 percent, said Jeff Shaw, chief executive officer at Southwest Gas Corp. in Las Vegas.
The utility distributes natural gas to nearly 1.6 million customers in five operating divisions: Las Vegas, Phoenix, Tucson, Carson City/Lake Tahoe and Barstow, Calif. It purchases gas from several producing basins in areas such as the Rocky Mountains, Canada and Texas.
In the past, Shaw said consumers used less natural gas in the summer, enabling utilities to store it for use during peak times or winter months, which helped keep prices down. But since the spread of natural-gas-fueled power plants, he said there’s no longer an opportunity to store gas at lower prices that can be passed on to customers.
Last year, the utility proposed a 6 percent rate hike that, if granted, will go into effect this September. “We make no profit on the sale of the commodity – we pass it along to the customer dollar for dollar,” said Shaw, adding that the last time the utility raised rates in Nevada was three years ago. “We receive a return on the infrastructure that we put in place to provide the delivery of the commodity to the customer.”
But even if the federal government lifts environmental restrictions that enable companies to explore natural gas reserves in areas like Alaska that are now off-limits, Shaw said it’s highly doubtful natural gas prices would quickly drop. The cost of capturing those supplies would have to be distributed among customers.
In the long run, however, he believes the best way to flatten prices is through a combination of mixed-price contracts at varying terms. “Given the current factors, you’ll continue to see price pressure in natural gas,” said Shaw. “A natural energy policy change, in which supply is opened up, is probably the action that needs to be taken in order for us to see [future] prices stabilize or abate.”
Drought Conditions
Unlike natural gas, water has been on the state’s most-wanted list for years. In Northern Nevada, the source of about 85 percent of water supplied by the Truckee Meadows Water Authority is the Truckee River. The balance comes from underground water wells, said Lori Williams, general manager at the three-year-old water utility, which services approximately 83,000 customers in the greater Reno/Sparks and Washoe County area.
The region is in the middle of an eight-year dry cycle. Between 2000 and 2003, Williams said the snow pack – which feeds the reservoirs in the Truckee River’s system – was between 20 percent and 55 percent less than average. During the late 1990s, the snow pack was reduced by almost half.
Although the utility supports a twice-a-week watering plan and another program that encourages drought-resistant plants and alternative landscaping, both are voluntary. By 2009, it expects to complete its water-meter retrofit program for about 45,000 customers who were not previously metered.
The Authority’s main challenge, however, stems from its predecessor, an investor-owned, electric, gas and water utility that combined all fees into one bill. “When you pulled out the water utility from the electric and gas utility, you ended up with an underfunded revenue stream to cover the cost to service customers,” Williams said, explaining that although customers were initially shocked, they now receive a separate water bill that accurately reflects service costs. “We’re refining [the costs] as we find out more information about the facilities that need to be constructed for new development in the community.”
In the southern part of the state, the cost of water isn’t the main issue. It’s availability. The area receives most of its water from the Colorado River, whose water flow has been substantially below normal for the past five years. The water level for lakes Mead and Powell, which act as reservoirs for the Colorado River, have also dropped by nearly 50 percent during the same time frame, said Dick Burdette, energy advisor to Governor Guinn and director of the state office of energy in Carson City.
“For the last few years, even though the Southern Nevada Water Authority (SNWA) has taken its full allocation and an additional supplement from the Colorado River, the river can no longer meet the needs of Las Vegas,” he said.
Years ago, when water allocations were determined, Las Vegas only supported a fraction of the population that it does now. But as the population boomed, Burdette said the allocations didn’t keep pace with the area’s growth. If the water shortage grows more severe, it could possibly limit construction activity in Southern Nevada, he warned.
But that’s not likely to happen anytime soon. SNWA and the Las Vegas Valley Water District are aggressively developing new water resources within Nevada, said Pat Mulroy, general manager of both utilities, which serve about 1.6 million customers. While an estimated 90 percent of Southern Nevada’s water comes from the Colorado River, Mulroy hopes that number will drop to about 60 percent within several years.
“Depending 90 percent on the Colorado River is a risky proposition,” she said, adding that SNWA plans to create additional basins to store water and bring in water from Indian Springs by 2007, then from the Virgin and Muddy rivers. “It’s imperative that this Valley drought-proof itself. The only way to do that is to develop a water supply separate from the Colorado River.”
Based on hydrology studies, Mulroy said there’s an estimated 150,000 acre feet of untapped water in Lincoln County and other parts of Nevada, which will last for decades and secure Southern Nevada’s water supply. In the future, she believes the Valley may even rely on desalinized ocean water.
Meanwhile, conservation has been the area’s first line of defense. The utility spent $22 million on a landscaping program that pays residents to remove turf, and it has budgeted another $33 million for next year. So far, area residents have used less water this year than in 2002 and 2003, despite the added growth.
“The community needs to pat itself on the back for keeping Nevada out of a crisis,” says Mulroy. “This drought won’t last forever. There will be periods of surplus again.”
