Crony Capitalism Driving Nevada Energy Controversy

Brian McNicoll |
Tuesday Oct 6, 2015 11:41 AM

Before long, NV Energy, the Warren Buffett-owned utility that serves southern Nevada, will run short of energy, or as they call it a large “open position,” and will likely seek permission to build a new power plant.

It’s not that demand has skyrocketed – indeed, three giant casinos in Las Vegas have announced plans to find their power elsewhere, the firm’s solar program has reduced need and demand increases are expected to be modest in coming decades.

It’s not that there aren’t other options. It has been reported that some of the vendors who currently supply peak power to NV Energy have offered to extend their current contracts with the utility and one of generators has apparently even offered to sell a plant directly to NV Energy.

No, it appears NV Energy wants to run short of power on purpose. And the“preferred” solution it wants to pursue is to build a new and costly power plant.

This won’t help its customers. Their bills will go up as a result of the addition of the new power plant built from scratch and the subtraction of those that now supply the power NV Energy sells.

But it will help Warren Buffett and his friends at Berkshire-Hathaway.

In most cases, electricity rates are set to allow power companies to recover their investment and make a profit of usually around 10 percent. The more power companies invest in new power plants, the more investment they have to recover. The more investment they have to recover, the higher the 10 percent add-on becomes.

According to the Wall Street Journal, a Duke Energy executive recently told investors that for every billion dollars it adds in assets, it boosts earnings by about 8 cents per share. No wonder NV Energy prefers shiny new.

And it doesn’t even pretend to build them in the most efficient manner possible. One recent project – the Henry Allen plant – was originally estimated to cost $682 million but ended up costing $800 million.

NV Energy is hardly the only company implementing this strategy. Capital spending by utilities has grown by more than a quarter in the last five years and topped the $100 billion mark for the first time in 2014.

Both SoCal Edison and North Carolina-based Duke Energy plan to spend$30 billion to $35 billion on capital projects over the next two years. SoCal Edison plans to spend $1 billion on replacing phone poles at a cost of $13,000 each.

Shiny new does not come cheap. Electricity rates nationwide have climbedfrom about $9 per kilowatt hour in 2008 to nearly $14 today as companies modernize and claim these windfalls.

Back in Nevada, NV Energy plans to build a 706-megawatt natural gas power plant that could cost ratepayers up to $1 billion. The new plant, which would be built in North Las Vegas, would run on natural gas and replace coal-fired plants the firm plans to take off line over the next four years.

NV Energy’s customers, who already pay the highest rates in the Mountain West, would have to cough up $70 million per year more for a firm that made $713 million in profits last year – a 27 percent increase just since 2013 and more than all the casinos on the Las Vegas strip combined.

And, as Michael Mattox, president of Wynn Resorts on the Strip said, that money doesn’t stay in Nevada. “It goes to Omaha,” he said, referring to Buffett’s headquarters.

This is part of why Wynn, MGM Resorts and Sands are prepared to leave NV Energy, even though that would involve a $90 million exit fee for each.

Mark Garrett, an expert on utility regulation, told the Nevada Public Utilities Commission recently that NV Energy’s actions follow a pattern of seeking “further increases even when they are clearly not in the public interest and are detrimental to the Nevada economy.”

Garrett said Nevada Power, a subsidiary of NV Energy that serves southern Nevada, has been “over-earning” – taking in 11 percent on top of expenses rather than the legally allowed 9.8 percent – and netted $84 million in this way from 2012 to 2014.
“A regulated monopoly such as Nevada Power should not be permitted to consistently over-earn at the expense of its captive customers,” saidGarrett, who accused the firm of being “tone deaf” about the economic situation in Nevada.

So the company has been pulling back from its present suppliers. It operates or has long-term agreements to buy power from 16 fossil fuel power plants, including coal and natural gas. In some cases, it is simply not pursuing negotiations to continue purchasing arrangements. In others, it is clearly saying current arrangements won’t be renewed.

Star West Generation, which operates a plant in Arizona that sells power to NV Energy during the peak summer months, falls into this bucket.

When NV Energy indicated to Star West Generation that it would not renew its agreement to buy power from Star West’s Griffith natural gas plant in Arizona when the current contract in 2017, Star West responded by offering to sell the plant to NV Energy. Star West executives say this would save ratepayers money, but NV Energy has not responded to the offer.

“Again,” said Garrett, “the company’s efforts appear to be driven by a desire to add to its rate base to increase earnings.”

Because it’s not the ratepayers NV Energy looks out for. It’s that money that goes to Omaha.