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Nevada PUC Report: Electric Choice Initiative Will Result In, "Likely Increase To Nevadan's Monthly Electric Bills"

Cites Costs In Hundreds of Millions To Billions

Notes Challenges In Establishing POLR/Default Service Model

April 20, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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The Nevada PUC has posted a final draft report on the Energy Choice Initiative, a ballot initiative which, if approved, would extend to all customers the right to choose their electricity supplier.

The report states, "The findings and analysis in this Report do not advocate or take any position supporting or opposing the Energy Choice Initiative. This Report is only intended as an objective resource to help educate all Nevadans, so that informed decisions are made regarding Nevada's energy future."

The report states, "Nevadans currently enjoy some of the lowest average electricity rates in the country, and Nevada is a leader in solar and renewable energy development, as well as job and business growth."

The report states, "The Energy Choice Initiative is reasonably likely to increase the average monthly electric bills of Nevadans, at least the [sic] in the short term, i.e., the first 10 years. These cost increases will potentially diminish over the years as Nevada's new open-market paradigm becomes established, Nevada's economy and population grows, and the transition costs are paid off."

The report states, "Plain language of the Energy Choice Initiative removes the authority of the PUCN and, subsequently, the Nevada State Legislature to control the generation component of a bundled electricity rate. This will cause new exposure for Nevada ratepayers to market volatility and profit-driven ratemaking practices. It may also bring theoretical benefits of open market competition to Nevada."

The report states, "The Energy Choice Initiative will likely require in excess of 100 million dollars in new startup costs and, thereafter, over 45 million dollars in new annual operation and maintenance costs."

The report states, "NV Energy will likely be forced to divest its generating assets and assign its long-term power purchase contracts to new owners. Nevada ratepayers will remain liable for any financial losses incurred by NV Energy from these stranded costs, which could foreseeably exceed several billion dollars. While these stranded costs will not be new to Nevada ratepayers, they will offset any possible benefits from an open and competitive market created by the Energy Choice Initiative."

The report states, "Nevada is unique from other states economically, geographically, and in terms of its resources. What is proposed through the Energy Choice Initiative -- an amendment to our state constitution -- fundamentally distinguishes this attempt to deregulate from those experienced by other states. Indeed, several other states undertook the prospect of deregulation via a 'grass-roots' movement through their respective public utilities commissions and legislatures. Here, in Nevada, the Energy Choice Initiative has been financed by corporate sponsors. While it had obvious voter support, it does not have hallmarks of a 'grass roots' movement by any means."

The report cites, "potential increased costs to maintain electric grid reliability."

The report states, "A number of NV Energy's current generation assets are referred to as 'reliability-must-run,' which means these facilities are essential to maintain the reliability of Nevada's electric grid. If these generation assets were divested pursuant to the Energy Choice Initiative, NV Energy will likely have to either enter into contracts with the owners of these new power plants at rates approved by the Federal Energy Regulatory Commission (FERC) or significantly invest in upgrades to its distribution and transmission infrastructure to maintain these 'must-run' resources. NV Energy estimates that this new infrastructure investment will total approximately 611 million dollars, with 425 million dollars for new infrastructure in Northern Nevada and 186 million dollars for new infrastructure in Southern Nevada."

Regarding start-up costs for the market, the report states, "Presuming, for illustrative purposes, that the Nevada State Legislature determines to join the California Independent System Operator (CAISO), some of the known monetary costs will be borne [sic] by Nevada ratepayers will include one-time startup costs. Estimates of these costs include the following: up to 250,000 dollars for a third-party study of CAISO and other wholesale market options, up to 500,000 dollars to join CAIS0, between 10 to 20 million dollars for new software and computer system technology for NV Energy in a wholesale market operated by CAISO (with 15 million dollars being mid-range), and between 49 to 95 million dollars for new integrated computer system technology for NV Energy in a retail market (with 72 million dollars being midrange), up to 3.3 million dollars for updates to the open access transmission tariff overseen by FERC, and up to 10 million dollars for initial outreach and education to Nevadans."

The report states, "Spreading these costs to ratepayers over a 10-year period shows that single-family residential customers in Southern Nevada could expect to see an increase of approximately $0.50 in their average monthly bill, and large commercial customers in Southern Nevada could expect to see an increase of approximately $3.47 in their average monthly bill. This represents a 0.4 percent increase for Southern Nevada based on NV Energy's current rates. Single family residential customers in Northern Nevada could expect to see an increase of approximately $0.39 in their average monthly bill, and large commercial customers could expect to see an increase of approximately $12.07 in their average monthly bill. This represents a 0.5 percent increase for Northern Nevada based on NV Energy's current rates."

Discussing stranded costs, the report states, "What is currently unknown are costs likely to arise from NV Energy's divestiture of generation assets and long-term power contracts. While Proponents of the Energy Choice Initiative proffer that NV Energy can sell its existing power plants and assign its contracts to someone else, this suggestion grossly overlooks the reality that current open market conditions for these obligations shows that they would likely be sold or assigned at a loss. No specific information regarding these costs has been provided by the Proponents of the Energy Choice Initiative. Based on rough estimates and today's market conditions, the PUCN conservatively estimates that these costs will total approximately 3.747 billion dollars. Totaling these [regulatory asset plus the stranded costs] costs equals approximately 4.074 billion dollars in combined regulatory and stranded asset costs."

The report states, "Spreading these costs to ratepayers over a 10-year period shows that single-family residential customers in Southern Nevada could expect to see approximately $24.91 added to their average monthly bill, and large commercial customers in Southern Nevada could expect to see approximately $172.56 added to their average monthly bill. Single-family residential customers in Northern Nevada could expect to see an approximately $6.52 added to their average monthly bill, and large commercial customers could expect to see approximately $204.48 added to their average monthly bill. Again, if these costs were spread over a period longer than ten years, the average monthly impact would decrease; but the interest owed on those financial obligations would increase."

"The total cost estimates discussed in this Report range from over a hundred million dollars in new costs to several billion dollars in remaining costs that will reasonably likely be added to Nevadan's monthly electric bills in an open and competitive market. These costs would be in addition to generation, distribution, and transmission costs, as well as any legislatively-imposed energy policy costs that the Nevada State Legislature may determine to impose. It is unreasonable for anyone to suggest that these costs will be nothing or will be immediately offset by new market electricity rates. Indeed, no reasonable basis exists to believe they will be, at least not in the short term, i.e., the first 10 years," the report states

"Based on the above-cited information and reasonable presumptions, the Energy Choice Initiative will likely increase the average monthly bills across Nevada customer classes. Exactly how much of an increase this will be depends on several variables, including decisions by the Nevada State Legislature and the market for generation assets and power purchase agreements," the report states

Regarding retail market design and default service or POLR service, the report states, "Nevada may be unable to replicate the Texas approach to incentivize customer migration through the 'price to beat' or a similar discriminatory-price mechanism. The proposed constitutional amendment requires that the Nevada State Legislature establish protections 'that entitle customers to ... competitively priced electricity, including, but not limited to, provisions that reduce costs to customers .... ' A legislative provision or a PUCN order that administratively establishes an above-market electric rate charged to customers in a competitive environment would likely violate the constitutional mandates of 'competitively priced electricity' and 'provisions that reduce costs to customers.' Therefore, in light of NV Energy's decision not to provide bundled retail service in the deregulated environment, the 'price-to-beat' mechanism employed in Texas would not be possible in Nevada."

"Without a mechanism to encourage customer migration to competitive suppliers of their choice, Nevada risks having a large portion of its electric customers remain with default providers. If this outcome occurs, it would severely undermine the stated purpose behind the proposed constitutional amendment. Neither proponent of the Texas transition model (RESA or Calpine) offers a non-price-based solution to encourage customer migration to competitive suppliers," the report states

"Alternatively, if NV Energy elects to remain an electricity supplier, Nevada can implement a much longer transition period by requiring NV Energy to provide standard-offer electric service at a regulated capped rate for a number of years before terminating the program. This approach would give customers an adequate adjustment period and, at the same time, force them to eventually migrate to a competitive supplier. However, as previously discussed in this Report, supra at 31, this approach may conflict with the proposed constitutional mandate set forth in the Energy Choice Initiative to establish an open and competitive market: a truly 'open and competitive market' is philosophically incompatible with governmentally-imposed rates," the report states

The report states, "VEA [Valley Electric Association] is the only entity that has offered to become the POLR for Nevada residents and serve current NV Energy customers, if the Energy Choice Initiative is approved. This is a real problem, as VEA does not currently have the resources to be the POLR for the entire state."

"Consistent with PUCN Regulatory Operation Staff's proposal (and Texas's experience), Nevada may be able to limit POLR service to basic electric service offerings without any above-market price premiums and still be consistent with the constitutional provisions of the Energy Choice Initiative. Yet, this remains uncertain because the Energy Choice Initiative establishes a new 'right to sell' electricity in an 'open and competitive' market. Low-income and rural Nevadans in hard-to-serve geographic areas or with limited credit/ financial resources will likely be more negatively affected than other customers because they will be less profitable to serve and will need a POLR the most," the report states

The report states, "Plain language of the Energy Choice Initiative permits electric service provided by community choice aggregation. Specifically, the Energy Choice Initiative provides that every political subdivision of Nevada has the right to choose the provider of its electric utility service and that nothing 'herein sha'' be construed as limiting such persons' or entities' rights to sell, trade or otherwise dispose of electricity.' However, dissolving the current regulatory model, which the Energy Choice Initiative does, to simply allow a Community Choice Aggregator to step in the place of NV Energy appears at odds with the purpose of the Energy Choice Initiative to provide an individual right to choose an electricity provider 'from a competitive retail electric market.'"

The report states, "Community choice aggregation needs further exploration as a possible model, if the Energy Choice Initiative is approved."

The report states, "Resource adequacy planning must remain within the authority of Nevada, and the PUCN, regardless of which wholesale and retail markets are joined and/or created. Nevada should incorporate this authority into any new market structure created by the Energy Choice Initiative."

The report states, "The California Independent System Operator (CAISO) appears the most viable option for Nevada to participate in an organized wholesale market. Yet, this option has challenges, due to the need for bi-state legislation and changes to CAISO's governance structure to ensure Nevada's interests are represented."

The report concludes, "The Energy Choice Initiative will cause Nevada to abolish its control over a key component of electric rates, and change the way Nevada has generated, bought, and sold electricity for over 100 years. No state has ever done it this way before, and it will likely create 'winners and losers.'"

"If history and experience are any type of guide, commercial and industrial ·customers, will fare far better, at least initially, than the average Nevada residential family through this proposed change. Large commercial customers who currently cannot depart bundled electricity service pursuant to NRS Chapter 704B may financially benefit the most, as they cannot currently access a competitive open marketplace that may offer benefits to high-volume electricity users. Monthly bills are reasonably likely to increase in the short term," the report states

Docket: 17-10001

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