Warren Buffett’s Utility Has A Plan To Make Nevada Pay More For Power

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Michael Bastasch DCNF Managing Editor
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The Warren Buffett-owned utility NV Energy has a plan that could pad the pockets of Berkshire Hathaway shareholders at the expense of Nevada residents by gaming the regulatory system meant to keep utilities in check, according to critics of the plan.

NV Energy, a major Nevada utility, seems to be intentionally creating a power shortfall into its three-year action plan in order to increase electricity rates for customers in order to build an expensive new power plant. Building the plant would mean a guaranteed rate of return for Berkshire Hathaway investors, but would also cause long-term energy price increases for Nevadans.

“NV Energy has filed a plan that would milk hundreds of millions of dollars from Nevada consumers to line the pockets of Berkshire Hathaway shareholders,” Malcolm Jacobson, the CEO of Griffith Energy, told The Daily Caller News Foundation in an interview.

Griffith is one of the energy providers NV Energy is trying to sever ties with by allowing their power purchasing agreement (PPA) to expire and opting instead to buy energy on the open market when needed. Griffith’s power plant provides NV with about 10 percent of its summer peak load electricity.

Jacobson noted that a PPA can lock in reasonable electricity rates for consumers as opposed to the open market, but doesn’t make shareholders any money.

“A PPA doesn’t make Warren Buffett any money,” he said. “Under the regulatory framework, NV Energy pays for the power and they can pass the cost on to ratepayers, but they don’t get a return on that. A new plant gets them a 10 percent rate of return.”

Three of NV’s largest clients, Las Vegas casinos, are petitioning to leave because they don’t want to get stuck with higher rates under the new action plan. Basically, NV will be shedding demand and power providers, but still sees the need to build a new power plant.

“The utility earned $713 million in net operating income last year, a 27 percent increase from 2013,” Matthew Maddox, president of Wynn Resorts, said at a recent Public Utilities Commission (PUC) hearing. “Just to frame these numbers, Nevada Energy made more net income than the Las Vegas Strip last year.”

“You can’t have a 27 percent increase in operating profit with no break on ratepayers and then try to claim ratepayers will be harmed when your net operating income is more than the Las Vegas Strip,” Maddox said.

NV Energy isn’t the first utility to use the regulatory system to generate guaranteed returns for shareholders. It’s a growing trend that utilities around the country are taking advantage of, pushing up electricity prices despite the increased use of cheap natural gas.

The Wall Street Journal reported in April that by spending more on capital improvements, utilities can take advantage of their government-guaranteed rate of return. This incentivizes utilities to spend more to make more.

“Capital spending has climbed at utilities nationwide—and so have their customers’ bills,” The WSJ reported. “It actually boosts their bottom lines—the result of a regulatory system that turns corporate accounting on its head.”

“It is common for utilities’ allowable profit to be capped at 10% or so of the shareholders’ equity that they have tied up in transmission lines, power plants and other assets,” the Journal reported. “So the more they spend, the more profits they earn.”

Companies like Duke Energy assume that for “every billion dollars in assets it adds to its inventory, it boosts earnings by about 8 cents a share,” according to WSJ.

There are other reasons, however, that utilities need to increase capital expenditures. One such reason is environmental laws at the federal and state level.

For example, EPA rules over the past few years are forcing coal-fired power plants to retire or be converted to burning natural gas — such changes to the grid will inevitably require new power plants, transmission lines and pipelines to meet such mandates.

But NV’s critics say EPA mandates have little to do with the utility’s plan to hike rates. Jacobson said that NV’s action plan will create a 15 percent shortfall by 2018 of projected demand, which he said the utility will likely use to justify building a $872 million natural gas-fired power plant and raise electricity rates on state residents.

“It’s what Buffett needs for its shareholders, essentially a guaranteed rate of return,” Jacobson told TheDCNF. “They’ll create this crisis of their own making, if you will.”

Griffith even offered to sell its own power plant to NV Energy for ““hundreds of millions of dollars less than the cost of the new plant,” according to Jacobson. But NV didn’t go for it, and Jacobson believes the company will soon seek approval to build a new plant to do exactly what Griffith’s plant already does — provide electricity during the hot summer months when demand spikes.

“The new plant could be a very expensive paper weight for eight months out of the year,” Jacobson said.

NV Energy did not respond to TheDCNF’s request for comment.

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