Fifty years ago, management at Nevada Power Company realized that the company’s allocation of electricity from Hoover Dam would not meet the demand of the rapidly growing Clark County population, which had tripled from 16,000 people in 1940 to 48,000 people in 1950. In response to this rapid growth, the company’s management decided to build its first power plant, Clark Station. The station’s first generator became operational in 1955.
Five years later in northern Nevada, it became apparent to Sierra Pacific Power Company management that they also needed to build their own power plants, after a fire destroyed the Donner Summit inter-tie, through which the company had purchased the bulk of its electricity. Customers of Sierra Pacific went several days without electricity in 1960 due to the fire.
The past provides a lesson for the future. A current cause for concern is the Load and Resource filings made by both utilities, which show utility-owned power plants are becoming an increasingly smaller percentage of the power necessary to meet peak load. For example, in 2005, Nevada Power’s resource filing shows an expected peak demand of 5,098 megawatts and the utility’s generation at 2,396 megawatts. The deficiency is not as bad for Sierra Pacific Power, where expected peak demand in 2005 is 1,633 megawatts and the utility’s generation is at 1,056 megawatts. Years beyond 2005 show peak demand increasing each year, but utility generation remaining stagnant. Obviously, we currently have too great a reliance on the wholesale market.
Another cause for concern is the age of some of the generating units of the utilities. Nevada Power’s first generating unit is still operating today. The generating units of Nevada Power that were built in 1980 or later represent only 885 megawatts of summer capacity. Sierra Pacific Power has only 488 megawatts of summer capacity that was built in 1980 or later. Older generating units are more likely to be out-of-service for longer periods when they break down, thereby requiring the utilities to make additional unplanned purchases of power. In addition, they tend to be less efficient than newer units, thereby raising the cost of the utilities to generate power.
The greatest concern regarding the deficiency of utility-owned generation is that it necessitates a reliance on the wholesale market, where costs are market-based. The Western energy crisis, which lasted from mid-2000 until mid-2001, provides a painful lesson in the volatility of market-based costs. During the crisis, it was not uncommon for Western utilities to pay $300 a megawatt hour for power that normally had sold for $30. The customers and shareholders of Nevada’s utilities are still paying the price for this crisis.
The construction of power plants by Nevada’s utilities is the only guarantee that new plants will be built to meet Nevada’s increasing demand for electricity, and that electricity sold from these plants will be at stable, cost-based rates. Customers reimburse utilities for the cost of the power plants through general rates. The addition of new utility power plants might increase the general rates slightly, but those potential increases pale in comparison to the sharp increases customers experienced for purchased-power costs during the Western energy crisis.
Shareholders of Sierra Pacific Resources will minimize their risks if the utilities build additional power plants and rely less on purchased power. If the Public Utilities Commission determines fuel and purchased-power costs were not prudently incurred, the recovery of those costs must be disallowed, thereby making the shareholders responsible for the imprudent fuel and purchased power costs. Shareholders looking for stability will benefit from utility-owned power plants, because the costs for those plants are recovered from the stable general-rate side of the ledger.
Investors looking for assurance will benefit by investing in utility power plants because these plants have a guaranteed market (the utility’s customers) for the electricity generated by the plant. Non-utility generators have no guaranteed customers. The need for utility power plants is determined in the state’s resource planning process before the expenditure of hard investment dollars. Once the need is determined, rates are set to assure investors a fair return on their investment.
To meet our energy needs in the future and to prevent exposure to another out-of-control wholesale market, we need to move forward with utility-owned generation. Nevada must return to a balanced portfolio of new utility-owned power plants, conservation, renewable energy resources and long-term wholesale contracts, to meet its energy needs. Bringing this mix back into balance will protect Nevada ratepayers from the wild whims of the wholesale market, and give assurance to shareholders and investors.