Sierra Pacific Resources:
In my past life I worked for Sierra Pacific Resources as a consultant. Sierra Pacific Resources is an electricity and gas utility that used to be based in Reno, Nevada. At one point Sierra Pacific Resources was going to merge with a utility in Spokane, Washington (I am not making this up, and yes, it makes no sense since they share no overlapping service territories nor even connecting transmission lines) but this deal fell through. Later, Sierra Pacific Resources merged with Nevada Power, the utility in Las Vegas. This deal, unlike the others, made sense.
Walt Higgins was the CEO of Sierra Pacific Resources. He left Sierra Pacific Resources to become the CEO of Atlanta Gas Light.
Nevada utilities have problems completely different from those in the midwest. In Nevada, they have massive GROWTH. In Las Vegas they had to purchase land constantly to build substations to stay ahead of the burgeoning population. They also knew that energy use was going to rise continually, especially with those energy-hungry casinos on the strip. This is different from utilities in the midwest, for instance, because their service territory is primarily "built out" already, although there is sprawl to contend with.
Nevada partially de-regulated in the late 90's and into the new century. By deregulating, SRP sold off most of its generation and relied on the "free market" to provide power for current needs and future growth. At the same time, the California market collapsed in a series of insane actions that let power prices skyrocket more than 10 fold and nearly led to the bankruptcy of the state. Nevada, since it was right next door to California, felt the blow because "cheap" power in Nevada was siphoned off by the rigged market to feed California's demand, leaving Nevada in the lurch. In addition, the California government and utilities had far deeper pockets than the ones in Nevada, leaving the Nevada utilities at death's door.
What Nevada Did About It:
I haven't been in Nevada working on electricity for several years. I knew that Sierra Pacific Resources (ticker: SRP) was near death's door with the situation, and their stock price had fallen very low, down to $2-3 (from a previous price of around $30 / share). It didn't seem like there was any way out.
Forbes, a magazine that I find very useful, wrote an article titled "Lighting Las Vegas" in their September 12, 2007 issue focused on Sierra Pacific Resources that described how the utility, and the state, turned everything around.
What did Nevada do about the situation? First of all, they called back Walt Higgins to run the place to try to save the day. They wanted someone who cared about the state and knew that running the utilities into the ground would be bad for everyone.
Per the article, here is what Walt did:
- Immediately increase rates by 17% so that SRP could afford to pay for the new, more expensive electricity (from the very same plants that SRP sold off and used to own...)
- He worked to jettison expensive contracts that were signed (almost at gunpoint) during the peak of electricity rates, else the state would have had no power at all
- Junk the broken deregulation and immediately start to build up the generation portfolio so that SRP could do a better job of generating their own electricity. He bought a partially finished power plant and set about completing it
How Nevada Compares to Illinois:
Nevada faced an immediate crunch due to the disaster in California and the fact that their energy systems were closely linked (Montana was crushed even worse, sadly enough, driving their utilities to destruction - read this sad article about their high rates and financial disaster). Unlike Nevada, Illinois didn't have neighbors that deregulated; Wisconsin is still heavily regulated and so is Indiana, and to a large degree these states didn't deregulate is because their power was cheap and under deregulation this low-priced power would all be sucked to Illinois such as occurred in California.
While Illinois has growth in our electricity market, the growth rate is also much slower than that of Nevada. Growth also makes any energy supply problem that much worse.
Illinois also had very high rates to begin with. After deregulation, there was a "rate freeze", which held rates at a generally high level for a decade. Over this decade the cost of energy has largely caught up with the high rates charged in Illinois, so the "rate shock" gap is proportionally smaller.
In addition, Exelon owns most of Illinois generation assets as well as the distribution company (ComEd) that serves the Chicago metropolitan area. The assets are owned by the corporate parent, not the regulated utility, but the fact that they are basically handing money from one pocket to the other gives the Exelon holding company some incentive not to totally strangle the golden goose by letting ComEd fall into bankruptcy. To be clear, Exelon sold off their coal fired assets (customer will wish they hadn't) but Exelon kept the nuclear plants that generate some of the regions' cheapest electricity (since we don't have much hydroelectric power here).
Thus Illinois has been able to stave off a Nevada, Montana or California disaster scenario due to:
- high rates at the start which were frozen at this high level for a decade
- lower growth than other regions
- neighboring states didn't really deregulate
- generation only partially spun off (owned by the holding company)
However, most of these items are wearing off. No substantial generation or transmission lines have been built for the state, and growth has been eating away at our available capacity surplus.
We ought to do what Nevada has done and push ComEd to own their own generating assets again. We should strike some sort of deal to pry back the nuclear assets from the holding company back in the generating company. ComEd should work to add NEW generation and transmission capacity to hold down prices and meet our growth. And the state should encourage other companies to step up and invest in generating assets in the state, even by having ComEd guaranteeing to take some of their power to make the lenders breathe easier.
New light bulbs, protests, political posturing and wishing the problem away have just frittered away a decade. With the long lead times on new power projects, we need to start working on the problem now.