Buffet’s Nevada power play

For many, it was exciting to hear that an investor of Warren Buffett’s stature would put billions into Nevada in order to acquire the state’s electric utility company.

The real story behind Buffett’s acquisition of NV Energy, however, centered on Senate Bill 123, a bill moving through the Nevada Legislature on its way to passage. That bill will substantially raise power rates while also resulting in untold millions in additional profits for the utility’s shareholders.

At the time the sale was announced, Senate Bill 123, dubbed NVision, had moved out of the state Senate, and the Assembly commerce committee was debating it. Sen. Kelvin Atkinson had sponsored the bill at the request of representatives of NV Energy and U.S. Sen. Harry Reid — who personally appeared in Carson City to push the measure.

NV Energy wanted the Legislature to order it to close its coal-fired power plants ahead of schedule and to replace the lost capacity with new natural-gas-fired power plants. But the utility also wanted to continue charging ratepayers for the shuttered coal plants until it received all of the remaining undepreciated balance on these plants, plus decommissioning costs, a guaranteed profit share and compensation for the stockpiles of coal the utility had purchased but no longer wished to use.

At the same time, ratepayers would be charged for the construction of the new, replacement power plants.

On net, there would be no increase in generating capacity. Rates, however, would increase. The plan made perfect sense for NV Energy shareholders, since their profits are determined as a set percentage of the utility’s costs. Hence, shareholders can realize greater earnings by operating less efficiently — particularly by building and switching to new power plants before they’re needed.

Colorado’s electric utility was able to shepherd a similar proposal through that state’s legislature in 2010. At the time, the utility estimated that the plan would cause electric rates to rise only 2 percent faster by 2020. However, economists now expect the mandate — which required Colorado’s utility to close 900 MW of coal-fired generation and replace it primarily with new natural gas — will cause electric rates there to rise at least 11 percent and as much as 50 percent.

Similarly, NV Energy testified that its proposed mandate — requiring the utility to close 800 MW of coal-fired generation — would only cause electric rates to rise 2.59 percent faster over a 10-year period. However, because natural-gas prices are both more volatile in the short term and are expected, by the U.S. Department of Energy, to rise more sharply over the long term, it’s highly likely that the real rate increase will look eerily similar to what’s expected in Colorado.

Nevada’s Public Utility Commission protested the plan on the grounds that it would impose unnecessary costs on electric ratepayers while also removing the plan’s entire implementation from the PUC’s regulatory oversight. Along with the state consumer advocate, the PUC testified vociferously against Senate Bill 123 during legislative hearings. One PUC spokesman went so far as to say “NV Energy’s rate-impact estimates aren’t worth the paper they’re printed on.”

At the same time, however, investors on Wall Street were keeping a close eye on the hearings and salivating over the profit potential that NV Energy could gain with the bill’s passage. They upgraded NV Energy’s stock with the expectation that Senate Bill 123 could become law.

Then, days before the Assembly commerce committee voted on the measure, Buffett announced his plans to acquire all of NV Energy’s shares. Reportedly, Buffett first engaged in talks with NV Energy’s directors around the time that the utility inserted its fuel-switch plan as a sweeping amendment to Senate Bill 123.

Buffett then began personally placing calls to key policymakers — including Gov. Brian Sandoval, Atkinson, and Senate Majority Leader Mo Denis — lobbying for the bill’s passage. At the same time, NV Energy lobbyists, led by Pete Ernault — longtime advisor to Sandoval — amped up the pressure on lawmakers to support the bill.

Within a week, the Legislature concluded with the Assembly passing the expensive new mandate Buffett sought. Eight days later, Sandoval would sign the measure into law, guaranteeing the “Wizard of Omaha” huge new profits — at the direct expense of Nevada ratepayers.

Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org.