At The Top - December 2000

Sierra Pacific Resources:

Weathering Tough Times

by Chuck N. Baker

In August, 55-year-old Walter M. Higgins was named chairman, president and CEO of Sierra Pacific Resources. Sierra Pacific is a holding company whose principal subsidiaries are Nevada Power Company (the electric utility for Southern Nevada) and Sierra Pacific Power Company (the electric utility for most of Northern Nevada and the Lake Tahoe area of California.) The firm also controls a natural gas and water distributor in the Reno-Sparks area, the Tuscarora Gas Pipeline Co., which owns 50 percent interest in an interstate gas transmission partnership, and Sierra Pacific Communications, a telecommunications company. Sierra Power, along with five other utilities, is also involved in forming an independent transmission company, TransConnect, to serve six states. Separately, its announced merger with Portland General Electric is still in the mix awaiting government approvals.

Nevada and other parts of the western United States have seen tremendous growth patterns in the past 10 years. Talk of a "power crunch" has some wondering if Sierra Pacific and other firms were caught short, even though statewide growth had been predicted. "With the wisdom of hindsight, we can all look back and say, the thing that worked wonderfully for Nevada and kept our power prices down for 10 years no longer works," Higgins stated. During the ’90s, Higgins said, "It was very clear that the right strategy for Nevada was to buy [from] the wholesale market and not build power plants." An overabundance of cheap power in the early ’90s meant that utilities did not invest in building new plants to generate electric power.

But in 1999, said Higgins, "We had the hottest May in 50 years, at a time of the year when power plants are traditionally shut down for seasonal maintenance. The loads went skyrocketing way beyond anything that anybody had seen in May before, and a funny thing happened on the way to the forum. The people who sell power into the market discovered they could kind of charge whatever they want." All over the West, wholesale power prices doubled or tripled their previous cost.

At the same time, Higgins noted, "Somewhere in the last year, quite unexpectedly ... oil went a different way. For a lot of reasons, including the oil cartel deciding that it was going to control production in order to get prices up, oil prices started to increase." According to Higgins, because oil and natural gas are often substituted for each other, "when the price of one starts to go up, it inevitably brings up the price of the other." At the same time, placing a high demand on the production system of natural gas resulted in a shortage. "At the prices we had been seeing until recently, it was not economic for somebody to drill for new natural gas," he said. So while prices were low, new well exploration lagged. Increased demand coupled with this insufficient supply caused the volatile gas markets to react with price increases from $1 to $2 to $5, and even as high has $7. "That’s positively scary price escalation," said Higgins, since most new power plants are fueled by natural gas.

Building new power plants may not have been the answer, according to Higgins. Doing so would have meant having to recover capital. "If the market goes the other way again, and it could ... we’d have to service the debt and the capital and the depreciation" on plants that are not generating profits, said Higgins. "Finding the right strategy for the western United States is very challenging."

He continued, "These are tough times for the company. We have put a lot of money out this year to pay for unexpected power costs. So our shareholders are really, in some sense, eating a lot of these excess power costs right now." Although rates have risen and could rise again, Higgins said, "I don’t think the kind of price changes we’re talking about will fundamentally change the dynamics of the overall economy of Nevada."

Despite all the changes taking place in the industry, Higgins said Sierra Pacific Resouces will continue to focus on what the customer wants. He sees Gov. Kenny Guinn’s decision to postpone deregulation in a positive context and feels Guinn is committed to competition, but is waiting to see if there is an energy policy that will produce a competitive market.