NEVADA POLICY RESEARCH INSTITUTE 

NVEnergyplanwouldimposebig,newhiddencostson

ratepayers 

‘Fuelswitch’planresemblesa‘bait‐and‐fuel‐switch’

GeoffreyLawrence2013

IntroductionNVEnergywantstoreplaceexistingpowerplantsbeforetheirusefulnesshasendedandforconsumerstonotonlypayforthenewplants,butalsotopaymoreinperpetuity.Aversionoftheplan,dubbed“NVision”bytheutility’spublicrelationsteam,wasfirstproposedtothestatePublicUtilityCommissionin2012.WhenthePUCrejectedtheproposal,thecompanytookittoSen.KelvinAtkinsonandAssemblymanDavidBobzien,whointroduceditintheNevadaLegislature’scurrentsessionasSenateBill123.1Ifenacted,NVEnergy’slegislationwouldrequirethefirmtoclosedownatleast800megawatts(MW)ofcoal‐firedelectricgenerationcapacitybeforethestandarddecommissioningdate—afterhavingconstructednewrenewableandnatural‐gas‐firedpowerplantstoreplacethatlostcapacity.ElectricratepayersinNevadashouldfindtheplanalarming,sinceacomponentoftheratestructurewouldreimburseNVEnergyfortheconstructioncostsassociatedwithbuildingnewpowerplants.Inotherwords,ratepayerswouldnotonlyhavetoreimburseNVEnergyforthecostsofconstructingthenewrenewableandnatural‐gas‐firedpowerplants,buttheywouldalsobeonthehookforallun‐depreciatedanddecommissioningcostsforthecoal‐firedplantsthatNVEnergynowwantstocloseprematurely.Theutilityevenwantstobecompensatedforthestockpilesofcoalithaspurchased,butnolongerwantstouse.SenateBill123alsoproposestoremovemanyoftheutility’sdecisionsaboutreplacingitscoal‐firedpowerplantsfromtheregulatoryoversightoftheNevadaPublicUtilitiesCommission.Languagefromthefirstreprintofthebillstatesthatthe“Commissionshallacceptanyelement”ofacapacityreplacementplanthatisconsistentwiththelegislation,regardlessofitspotentialimpactonratesorreliabilityofservice.Suchautomaticdeferencetothestate’selectricmonopolyputsratepayersatsubstantialadditionalrisk.Whileelectricityproducedfrombothcoalandnaturalgasiscurrentlyinexpensiveincomparisontoelectricityproducedthroughothermeans,fuelpricesfornaturalgasaremuchmorevolatilethanforcoal.TheU.S.DepartmentofEnergypredictsthatnatural‐gaspricescouldmorethandoubleby2040,growingfromthe2013openingpriceof$3.25permillionBritish

ThermalUnits(BTU)to$7.83.2Overthesametimeperiod,coalpricesareonlyprojectedtoincreasefrom$2.13to$3.08permillionBTUs.3Sincepowerplantstypicallyhavea30‐to40‐yearlifecycle,bothlong‐termcostgrowthandshort‐termvolatilityhavebeenvalidconcernsofregulators.BecausetheNVisionplanwouldpushasidethesecostconcerns,ithaspromptedsharpcriticismfromboththeNevadaPublicUtilitiesCommission4andthestate’sconsumeradvocate.5PricechangesinnaturalgascoulddrasticallychangeforecastscenariosNVEnergyisnotthefirstelectricutilitytoproposeaplansimilartoNVision.In2010,lawmakersinColoradopassedHB1365,6whichallowedutilitiesinthatstatetoclose900MWofcoal‐firedgeneratingcapacityaheadofscheduleandconstructreplacementnatural‐gas‐firedpowerplants,whileforcingratepayerstocoverthecostofthefuelswitch.Atthetime,Colorado’sprimaryutilityprovider,XcelEnergy,estimatedthattheplanwouldcostabout$1billionoversevenyearsandcauseelectricityratestoriseabout2percentfasterby2020.7TheColoradoPublicUtilitiesCommissioncontractedwithagroupofeconomistsatColoradoStateUniversitytomodeltheeconomicimpactofXcel’sprojectedrateincrease.Theyestimatedthateventhisslightincreaseinelectricitypriceswouldcausetotalhouseholdincometofallby$86millionasindividualshadlessdisposableincomeandbusinessesabsorbedtheadditionalproductioncosts.Theyfurtherestimatedthatstateandlocaltaxrevenueswoulddeclineby$2.03millionandthat833jobswouldbedestroyed,onnet,bythehigherenergycosts.8NVEnergynowestimatesasimilarrateincreaseasaresultofSB123.CompanyprojectionsshowthatNVisionwouldcauseratestorise2.59percentfasterovera10‐yearperiod.9However,itislikelythattherateprojectionsofferedbyXcelandNVEnergyaredramaticallyunderstatedbecausetheyhavenotadequatelyaccountedforthelong‐termgrowthandshort‐termvolatilityproblemsassociatedwithnatural‐gasprices.DatafromtheU.S.DepartmentofEnergy’sEnergyInformationAdministrationshowsthatnatural‐gaspriceshavebeenextremelyvolatileinrecentdecades,reachinghighsabove$14permillionBTUsandsubsequentlyfallingaslowas$2permillionBTUs.Infact,betweenjustJanuary2013andMay2013,thenatural‐gasspotpricehasclimbedbyaboutonedollarpermillionBTUs.10NVEnergyhasnotmadetheassumptionsunderlyingitscalculationspubliclyavailable,butiftheutilityhascalculatedbasedoncurrentnatural‐gasprices,whichhoveraround$4.15permillionBTUs,thenitisalreadysignificantlyunderstatingtheriskthatNVisionposestoratepayers.

Source:U.S.DepartmentofEnergy,EnergyInformationAdministrationTheextremevolatilityofnatural‐gaspricescouldforceratesmuchhigherbecauseNVEnergyisallowedtoadjustratesupward,onaquarterlybasis,torecoverthosehigherfuelcostsfromratepayers.Thisadjustmentoccursoutsideoftheutility’sgeneralrate‐regulationscasesandisknownasa“fuelcost”adjustment.Thus,projectionsfromtheutilitythatonlyshowincreasesingeneralratesfromtheNVisionproposalwillfailtocapturethetotalimpactontheratesNevadansmaypayiftheproposalisadopted.Thisrealityisparticularlyrelevant,giventhevolatilityofnatural‐gasfuelpricesandthelargeproportionoftotalgenerationcoststhatfuelsconstitute.Doesn’tSB123includeacontrolonratehikes?Section11ofSB123setsalimitontherateincreasesthatNVEnergycanseektorecoverfromtheconstructioncostsofreplacementpowerplants:5percent.However,thisratecapisonlyrelevanttothefacilityconstructioncoststhatareincludedingeneralratehearings.NVEnergycanstillincreaseratesbeyondthis

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amount,onaquarterlybasis,throughafuel‐costadjustment.ThismeansthattotalratehikesduetoNVisionarelikelytobesignificantlyhigherthan5percent.Costprojectionsunderalternativescenariosofnatural‐gaspricesWhilevolatilitymakesitdifficulttopredictfuturepricesfornaturalgas,itispossibletocomparetheall‐in,ortotal,costsofelectricityproductionfromnaturalgasatdifferentpricelevelswiththeall‐incostsofelectricityproducedthroughothermeans.Todoso,energyeconomiststabulateallcostsrelatedtoelectricityproduction,whichinclude:constructioncosts,maintenanceandoperationscosts,fuelcostsanddecommissioningcosts.Thesefactorsareweighedagainsttheassetlifeofthepowerplantandtheplant’scapacityfactor(theproportionofactualproductionovertimetothemaximumproductionlevelthatistheoreticallypossible)inordertocalculatealevelizedcostofenergyproduction.Thislevelized11cost—expressedasadollarfigureperunitofelectricity—allowseconomiststocomparetherelativecost‐efficiencyofdifferentpowerplants.ThisanalysisusesindustryaveragesprovidedbytheEnergyInformationAdministrationtocalculatethelevelizedcostofelectricityproductionfromcoal‐fired,nuclear,windandsolarpowerplants.Thesearethencomparedtothelevelizedcostofelectricityfromnatural‐gas‐firedpowerplantsunderavarietyofassumptions.Unsurprisingly,itshowsthatwhenfuelpricesarelowfornaturalgas,natural‐gas‐firedpowerplantslookcompetitivewithcoal‐firedpowerplants.Butwhenthosepricesrise,electricityfromnatural‐gas‐firedpowerplantsbecomescomparativelyexpensive.Atthecurrentspotpriceof$4.15permillionBTUsfornaturalgas,thelevelizedcostofelectricityis$60.74permegawatt‐hour,or6.07centsperkilowatt‐hour(kWh).Thelevelizedcostfornewcoalplants,bycomparison,is5.61centsperkWh.However,ifthepriceofnaturalgasrisestojust$6permillionBTUs,thenitslevelizedcostclimbsto7.39centsperkWh.At$8permillionBTUs,thelevelizedcostofnaturalgasis8.81centsperkWh.Whilethelevelizedcostofelectricityfromothernon‐coalresourcesremainssubstantiallyhigherthanfornaturalgas—evenat$8permillionBTUs—itisclearthattheincrementalcostsofswitchingfromcoaltonaturalgasescalatequicklyasthepriceofnaturalgasrises.Thisisnotonlyimportantinthecontextofshort‐termpricevolatility.EstimatesfromtheEnergyInformationAdministrationalsoprojectthatthepriceofnaturalgaswillrisemorequicklythanthepriceofcoaloverthenextseveraldecades.

Source:U.S.DepartmentofEnergy,EnergyInformationAdministration

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ProjectedAnnualSpotPricesforCoal,NaturalGas2013‐2040

($/millionBTUs;2011chaineddollars)

NaturalGas Coal

Asaresult,theincrementalcostsofreplacingexistingcoalcapacitywithnaturalgasshouldbeexpectedtoincreaseovertime.NVEnergy,underSB123,wouldbeabletorecoupthisgrowingcostfromratepayersthroughquarterlyfuel‐costrateadjustments.Whataboutrenewables?ThefirstreprintofSB123requiresNVEnergytoreplaceatleast800MWofcoalcapacitywithatleast700MWofnaturalgascapacityandatleast600MWofrenewablecapacity.Pendingamendmentstothebill,however,wouldreducethosereplacementspecificationsto550MWofnewnaturalgasand350MWofrenewablegeneration.Asthelevelizedcostanalysispresentedhereshows,however,thecostofnewwindorsolargenerationisnotonlyfarinexcessofcoal‐firedgeneration,itisalsofarinexcessofnatural‐gas‐firedgenerationevenatthehighfuelpriceof$8permillionBTUs.Itappearsfromthebill’scurrentlanguagethatNVEnergywillbeunabletorecouptheadditionalcostsofconstructingrenewablefacilitiesbeyondthe5percentlimitationonratehikes.However,eventhisappearanceismisleading.First,ifNVEnergyelectstomeettherequirementbyconstructingwindturbineswithnaturalgasasaback‐upgenerationsourcetoprotectagainstvariabilityinwindproductionlevels,itcanstillrecoupadditionalfuelcostsfornaturalgasthroughthefuel‐costadjustmentprocess.Second,totheextentNVEnergyusesnewrenewablecapacitytosatisfytherequirementsofthestate’sRenewablePortfolioStandard,theutilitycanincorporateallofthoseadditionalcostsintotheratestructureandSB123’srate‐hikecapwouldhavenoeffect.WhydoproponentssupportNVision?Thebiggestproponentofthisscheme,NVEnergy,standstobenefitforthemostobviousreason:Itwillrakeinmoremoney.Asaregulatedmonopoly,NVEnergyisguaranteedareturnonequityof10.5percent.ItisfromthisreturnonequitythatNVEnergy’sshareholdersderivetheirprofits.ThisregulatorystructuregivesNVEnergyandsimilarlyregulatedutilitiesaperverseincentive:Itfinanciallyrewardsthemiftheycangetstatelawmakerstoimposeonthemmorecostlyandinefficientproductionmethods.

Themathissimple:Iftheutilityisrequiredtoproducethroughmorecostlymeansandshareholderprofitsareguaranteedasapercentageofthosecosts,thenshareholdersmakemoremoneybyproducinglessefficiently.Ratepayers—facingaprivate,yetgovernment‐enforcedmonopoly—havenochoiceamongprovidersandsoareeffectivelyforcedtopaythehigherratesthatresult.ThisrecognitioniswhyNevadaandmostotherstatesrequireutilitiestoreceivepermissionfromapublicutilitiescommission—wheretheyareopposedbyastate‐fundedconsumeradvocate—beforethemonopoliesarepermittedtotakealmostanyaction.Thetraditionalroleoftheutilitiescommission,inthissense,istoensuretheutilityisfinanciallyviablewhilealsoprotectingconsumersagainsttheexcessesofmonopolisticprivilege.(Afewstates,ledbyTexas,havetakenadecidedlymorefree‐marketapproachinrecentdecadesbyallowingforopencompetitionontheretailelectricitymarket.InTexas,retailproviderscompeteonthewholesalemarkettosignpower‐purchaseagreementswithrenewableandconventionalgenerationfacilitiesandworktoestablishareputationforcost‐controlandreliability.CustomersareabletoshopfreelyamongtheseretailprovidersthroughaportalontheTexasPublicUtilityCommission’swebsiteonthebasisofprice,termofcontractandrenewablecontentofferedbyeachprovider.12Notcoincidentally,Texanstodayfaceretailprices17.5percentlowerthantheydidin200213—whileretailpricesinNevadarose31.1percentoverthesameperiod.14)However,akeyobjectiontoNVisionfromtheattorneygeneral’sBureauofConsumerProtection—thestate’sconsumeradvocate—isthattheplanwouldallowNVEnergytoreplacethepowerpurchaseagreementsitholdswithmanyindependentpowerproducerswithnewlyconstructedfacilitiesowneddirectlybyNVEnergy.Significantly,ratepayersaren’tobligedtoprovideareturnonequityforpowerthatNVEnergypurchasesonthewholesalemarket.Theyare,however,obligedtodosoforfacilitiesthatareowneddirectlybytheutility.15HowwillNevadahouseholdsbeimpactedbyNVision?TheNVisionplanwillincreaseNevada’sretail‐electricityprices.WhileNVEnergyadmitsthisexplicitly,theutility’sprojectionofa2.59percentincreaseismostlikelydramaticallyunderstated.Thatisbecauseofthelong‐termriseandshort‐termvolatilityassociatedwithnatural‐gasprices.BezdekandWendling(2011)modeledtheeconomicimpactofColorado’sfuel‐switchlegislationandconcludedthatelectricitypriceswouldrisebetween11and50percentonceallcostswereincluded.TheyestimatedthatColoradoratepayerswouldpaybetween$5billionand$22billionmore,cumulatively,overthe2011‐

2020periodasaresultofthelegislationandthatthiswouldresultinnetlossofbetween280,000and1,180,000jobs.16Whatevertheactualratehikemaybe,policymakersshouldrecognizethatpoliciesthatraiseelectricrateshavetheimpactofataxonelectricityconsumption.Electricityisakeyinputintonearlyeveryproductiveprocess.Consequently,thistax,ifpassed,willraisethecostofbusiness,leadingtoalossofeconomicoutput.Householdswillalsobeleftwithlessdisposableincome,asagreatershareofincomewillgotowardpowerbills.Thismeansthatindividualswillspendlessonothergoodsandservices,causingdeclineinbusinessrevenue.Anumberofstudieshavetriedtoquantifytheimpactofhigherenergypricesoneconomicoutput.RoseandWei(2006)findthatforevery1percentriseinenergyprices,overalleconomicoutputshrinksby0.1percent.17Blumel,EspinozaandDomper(2009)findanevenstrongerrelationship,estimatingthata1percentincreaseinenergypricesresultsina0.16to0.85percentdeclineineconomicoutput.18BezdekandWendling(2011)review55econometricstudiesthatexaminetheimpactofenergyandelectricitypricesoneconomicoutputandfindthateveryoneconcludeshigherenergypricesresultinlosteconomicoutput,albeittovaryingdegrees.19Thus,NevadanscanexpectNVision—ifpassedbytheNevadaLegislatureandsignedbyGov.BrianSandoval—toreduceeconomicoutput.Themostacuteimpactwillbeexperiencedbylow‐incomefamiliesandenergy‐intensiveindustriesinNevada.Thoseindustriesincludecasinosandelectronicdatacentersthatwillfacesubstantiallyhigherenergycosts,whichwilllimittheircompetitiveness.Studieshavealsoshownthathigherenergycostshaveahighlyregressiveimpact,sinceenergyexpendituresconsumeahigherproportionofincomeforlow‐incomeindividualsandfamilies.Trisko(2013)compileddatafromtheEnergyInformationAdministration,U.S.CensusBureauandtheCongressionalBudgetOfficetoexaminetheimpactofrisingenergypricesonNevadahouseholdsindifferentincomebrackets.Hefindsthathouseholdsearninglessthan$10,000annuallypayanaverageof$3,509annuallyinenergycosts,consuminganaverageof57percentofthehouseholdbudget.Asenergycostshaverisen,thisspendinghasdisplacedspendingonothernecessities,includingfood,clothingandhousing.Forhouseholdsearningmorethan$50,000annually,energycostsaccountforonly8percentofhouseholdspending.20

EstimatedNevadahouseholdenergycostsbyincomecategory(Trisko,2013)Pre‐taxannualincome

<$10k $10k‐$30k $30k‐$50k >$50k Total

Pct.oftotalhouseholds

7.1% 22.2% 21.6% 49.2% 100.0%

Est.avg.after‐taxincome

$6,157 $19,280 $35,624 $85,479 $57,177

ResidentialEnergycost

$1,449 $1,524 $1,733 $2,275 $1,933

Electric $1,120 $1,158 $1,344 $1,724 $1,473NaturalGas $255 $284 $302 $427 $357

Other $74 $82 $87 $123 $103Gasoline $2,060 $2,425 $3,376 $4,713 $3,730TotalEnergy

$3,509 $3,950 $5,109 $6,988 $5,663

Energy%ofafter‐taxincome

57% 20% 14% 8% 10%

Hence,furtherrateincreasesduetoSB123orotherpendinglegislation,includingSB252,21willharmthoseatthelowerendoftheincomescalemostacutely.ConclusionNVision,asproposedinSB123,wouldincreaseelectricityprices.NVEnergy’sestimatesoftheexpectedratehikesmostlikelyunder‐reporttheextentofthoserateincreases,duetotheshort‐termvolatilityandlong‐termincreasesinnaturalgasprices.Further,theutilityreportsonlytheexpectedincreaseingeneralrateseventhoughpricesshouldbeexpectedtorisefarmorethroughquarterlyfuel‐costadjustmentswhichoccuroutsideofthegeneralrate‐casehearings.WhileNVEnergyshareholderswouldusetheutility’smonopolypowertoreaphigherprofitsthroughNVision,ratepayerswouldbeforcedtobearsignificantlyhigherelectricityprices—depressingstateeconomicgrowthandhavingasharplyregressiveimpactonNevadahouseholds.IndependentestimatesofsimilarlegislationinColoradoshowthatratescouldrisebetween11and50percent,basedondifferingassumptions.

Forsuchreasons,Nevadastateregulatorsandconsumeradvocateshaveclamoredagainsttheproposal,statingthatitundulybenefitsNVEnergywhileharmingelectricconsumers.And,indeed,theevidenceshowsthatNVEnergy’sfuel‐switchplan,ascurrentlyconfigured,isawell‐optimizedrent‐seekingscheme.Givenitshiddencostsandrisks,wags—withreason—arereferringtotheproposalasa“bait‐and‐fuel‐switch”offering.ItisonemorepieceofevidencethatNevadaneedstoabandonits“yourpoliticaldaddyknowsbest”approachtoenergypolicyandallowratepayersthebenefitsofmorefreedominenergymarkets. 1NevadaLegislature,77thSession,SenateBill123,http://www.leg.state.nv.us/Session/77th2013/Reports/history.cfm?ID=321.2U.S.DepartmentofEnergy,EnergyInformationAdministration,“NaturalGasSpotandFuturesPrices(NYMEX),”HenryHubSpotPrices,http://www.eia.gov/dnav/ng/ng_pri_fut_s1_w.htm.3U.S.DepartmentofEnergy,EnergyInformationAdministration,“CoalSupply,Disposition,andPrices,”http://www.eia.gov/coal/.4See,e.g.AndrewDoughman,“NineproblemsregulatorshavewithNVEnergy’scoal‐ditchingplan,”LasVegasSun,April30,2013,http://www.lasvegassun.com/news/2013/apr/30/nine‐problems‐regulators‐have‐nv‐energys‐coal‐plan/#axzz2Tu9tQtX0.5AndrewDoughman,“Consumerwatchdog:NVEnergyplanwilldriveuprates,guaranteeprofits,”LasVegasSun,April3,2013,http://www.lasvegassun.com/news/2013/apr/03/consumer‐watchdog‐nv‐energy‐plan‐will‐drive‐rates‐/#axzz2Tu9tQtX0.6ColoradoLegislature,2010Session,HouseBill10‐1365,http://www.leg.state.co.us/CLICS/CLICS2010A/csl.nsf/fsbillcont3/0CA296732C8CEF4D872576E400641B74?Open&file=1365_enr.pdf.7XcelEnergy,“CleanAir‐CleanJobsActEmissionsReductionPlan,”CPUCDocketNo.10M‐245E,August2010,https://www.dora.state.co.us/pls/efi/efi_p2_v2_demo.show_document?p_dms_document_id=65813&p_session_id.8HarveyCutleretal.,“AnalyzingtheEconomicImpactsofHouseBillHB10‐1365,”ColoradoStateUniversity,PreparedforColoradoPublicUtilitiesCommission,September2010.9RateimpactexhibitdistributedbyNVEnergyatNevadaLegislature,May9,2013.10Opcit.,EnergyInformationAdministration,note3.11“LevelizedEnergyCost(LEC,alsoknownasLevelisedCostofEnergy,abbreviatedasLCOE[5])isthepriceatwhichelectricitymustbegeneratedfromaspecificsourcetobreakevenoverthelifetimeoftheproject.”Wikipedia.

12StateofTexas,PublicUtilitiesCommission,TexasElectricChoiceEducationProgram,http://www.powertochoose.org.13StateofTexas,PublicUtilitiesCommission,“Reporttothe82ndTexasLegislature:ScopeofCompetitioninElectricMarketsinTexas,”2011.14U.S.DepartmentofEnergy,EnergyInformationAdministration,AverageRetailPriceofElectricitytoUltimateConsumersdatabase.15SeeDanJacobsen’scommentsinThomasMitchell,“NVEnergywantsthecustomertopaytoshutteritscoalplant,”TheElyTimes,April12,2013,http://www.elynews.com/opinion/article_f13561be‐a2f0‐11e2‐80dd‐001a4bcf887a.html.16RogerBezdekandRobertWendling,“EconomicandEnergyImpactsofFuelSwitchinginColorado,”ManagementInformationServices,Inc.,Presentedatthe2011WesternEnergyPolicyResearchConference,Boise,Idaho,August2011,http://epi.boisestate.edu/media/8436/22_roger%20bezdek_economic%20and%20energy%20impacts%20of%20fuel%20switching%20in%20colorado.pdf.17AdamRoseandDanWei,“TheEconomicImpactsofCoalUtilizationandDisplacementintheContinentalUnitedStates,2015”PennsylvaniaStateUniversity,PreparedforTheCenterforEnergyandEconomicDevelopment,Inc.,July2006,availableat:http://www.coalcandothat.com/images/content/PennState2006UpdateFinal072506.pdf.18GonzaloBlumel,RicardoEspinoza,andM.delaLuzDomper,“DoesEnergyCostAffectLongRunEconomicGrowth?TimeSeriesEvidenceUsingChileanData,”InstitutoLibertadyDesarrollo,FacultaddeIngenieria,UniversidaddelosAndes,March2009,http://www.libertadydesarrollo.cl/lyd/controls/neochannels/neo_ch3758/deploy/elaee_energy%20and%20growth_24%20march%202009.pdf.19Opcit.,BezdekandWendling,note15.20EugeneTrisko,“EnergyCostImpactsonNevadaFamilies,”PreparedforAmericanCoalitionforCleanCoalElectricity,March2013,www.americaspower.org.21NevadaLegislature,77thSession,SenateBill252,http://www.leg.state.nv.us/Session/77th2013/Reports/history.cfm?ID=635.ForaneconometricanalysisoftheimpactofNevada’sRenewablePortfolioStandard,seeDavidTuercketal.,“RPS:ARecipeforEconomicDecline,”NevadaPolicyResearchInstitutepolicystudy,April2013,http://www.npri.org/docLib/20130424_RPS‐ARecipeforDecline.pdf.

GeoffreyLawrenceisdeputypolicydirectorfortheNevadaPolicyResearchInstitute.