ELKO — The passage of Question 3, or the Energy Choice Initiative, promises to change the way Nevadans generate, buy and sell electricity.
For Elko-area electricity users, the proposed shift to a competitive market for electricity would affect the two monopolies serving the northeastern corner of the state, while allowing new industry players to step in. The effect on the price of electricity under the initiative remains uncertain, as a competitive market removes local regulatory control over rates and turns them over to the open market.
Question 3, on the ballot for the second election cycle this year, would amend the state constitution to require that “electricity markets be open and competitive so that all electricity customers are afforded meaningful choice among different providers, and that economic and regulatory burdens be minimized in order to promote competition and choices in the electric energy market.”
The mode of change, a constitutional amendment, is unprecedented among states that have converted to an open market and would “make the implications of the Energy Choice initiative relatively permanent and unique to Nevada,” according the Public Utilities Commission of Nevada’s Energy Choice Initiative final draft report, an investigatory docket filed April 18.
Seventeen states in the U.S. have partially or fully converted to an open market, the PUCN reports. Some markets have been arguably successful, and some have backpedaled on their decisions. The Massachusetts attorney general in late March called for an end to the competitive electricity supply market for residential customers, citing aggressive sales tactics, false promises and the targeting of certain groups.
Nevada voters approved the Energy Choice Initiative during the 2016 general election, with more than 72 percent voting “yes,” and 28 percent voting “no.” The measure appears again on the ballot this year because constitutional amendments must be approved by voters twice. If it passes, the state Legislature must create laws by July 2023 to open the energy market to competition.
In preparation for the possible change, Gov. Brian Sandoval assembled the Committee on Energy Choice “to identify the legal, policy, and procedural issues that need to be resolved, and to offer suggestions and proposals for legislative, regulatory, and executive actions” if the ballot measure passes. The committee directed the PUCN to create the investigatory docket.
In the current system, where one utility dominates the market, the PUCN regulates rates. The open market would set rates in the proposed competitive system, which is subject to “market volatility and profit-driven ratemaking practices,” according to the PUCN. Because the regulatory agency and Legislature would lose their oversight, the action is sometimes called “deregulation,” although some prefer to call it “reregulating” or “restructuring.”
“Deregulation is a misnomer. I actually think it is pejorative because you don’t deregulate,” said Ned Ross, a lobbyist for the Retail Energy Supply Association, an advocacy group for competitive energy markets.
Ross also provides government relations support for Direct Energy, a United Kingdom-based electricity and natural gas provider in the United States and Canada. He visited the Elko Daily Free Press April 25 to explain that RESA, which he said is not aligned with those who drafted the initiative, hopes to help Nevadans understand what a competitive market means and help the Legislature form laws to build the system.
“My hope is that we’re going to come in here and help Nevada form an even better market,” Ross said.
Proponents of the initiative advertise that the ballot question, financed by corporate sponsors, will lower rates and allow for more renewable energy in Nevada. At a January PUCN workshop, however, no representative from the Proponents of the Energy Choice Initiative would go on the record to affirm statements, which can be found on energyfreedomnv.com. In addition to much more, the proposed amendment language directs the Legislature to consider provisions that reduce costs to consumers.
Ross fell short of saying that prices would decrease under a competitive market system because rates are tied to the volatile price of the fuels used to generate electricity.
“What I can tell you with confidence is that if you set the market up correctly,” he said, “you will enjoy the lowest energy prices you can possibly have … in a competitive market [rather] than in a vertically integrated monopoly.”
In northeastern Nevada, electricity providers are NV Energy and Wells Rural Electric Co., a legal and natural monopoly, respectively. Neither can exist the same way if the ballot measure passes, and changes will affect the electricity users exercising choice at the ends of their lines.
The initiative would also make way for other companies with different business models – including Direct Energy, which operates under multiple brands in the partially deregulated state of Texas where Ross is headquartered.
NV Energy has operated in the state for more than 150 years and serves 1.3 million consumers over 46,000 square miles. Owned by a Berkshire Hathaway subsidiary, the public utility company generates electricity at 14 facilities in Nevada, providing 82.7 percent of the state’s electrical power in 2016, according to the 2017 Status of Energy Report released by the State of Nevada Governor’s Office of Energy.
Collectively providing power for northern Nevada are four generating stations, including the coal-fired North Valmy Generating Station, along with other utilities and independent power providers, including several geothermal plants. NV Energy also owns the transmission and distribution system that delivers electricity to consumers, and serves as the balancing authority for most of Nevada.
The state’s existing policy provides for electric utility monopolies such as NV Energy, with the PUCN overseeing to ensure compliance with the laws. In the current structure the PUCN can control the bundled electricity rate, the agency reports. Under deregulation, the PUCN would continue to set distribution costs, and the Federal Energy Regulatory Commission would continue to set transmission rates.
“What does it mean to move from a 100-year-old vertically integrated monopoly utility model to something where people come in and compete for your business?” Ross said, explaining that RESA representatives have frequently helped inform state lawmakers posed with this question. “We will be here to help your legislature and your commission start down the path of formulating those rules.”
In a brief history of government involvement in energy monopolies, the PUCN cites a U.S. Supreme Court document that states an electric public utility could not “be operated with efficiency and economy unless it enjoys a monopoly of its market.” If an open market is allowed to operate, the PUCN writes, competing electric utilities could run each other into bankruptcy and cause the rise of a new monopoly exempt from regulatory oversight.
If the ballot question passes, NV Energy testified that it likely will divest its generating assets and assign long-term power purchase contracts to new owners — both of which could negatively affect ratepayers’ electricity bill initially, the PUCN states. The cost of canceling long-term power contracts has been estimated at $5 billion to $7 billion, and Ormat Technologies Inc., which contracts with NV Energy to provide geothermal power to the grid, states that termination or abrogation of its contracts cannot be done “without major litigation,” according to the PUCN’s summary of participant comments from a workshop. RESA asserts that the Energy Choice Initiative does not require divestiture, but acknowledges that it is an option.
“What we hope to see is a very successful NV Energy utility that operates poles and wires that is financially strong, that is able to expand and grow and interconnect with the least cost and most efficient, cleanest forms of energy around the state,” Ross said. “So we support NV Energy winding up being a strong regulated utility.”
Additionally, under the proposed system, the Legislature would have to decide how to structure the wholesale market, partly balanced by Nevada Energy in the current system. An option could be joining the California grid operating system, which would balance supply and demand of electricity for Nevada.
“We [at RESA] want the power-generating sector to be fully competitive and operate in a liquid trading environment, a place where you can readily buy and sell power,” Ross said, explaining that the association has a trading group that can negotiate contracts from generation operators, rather than the grid operator, if the market is open.
Although an NV Energy representative said the company is not granting interviews about the ballot question, an email statement said that NV Energy is working with the Coalition to Defeat Question 3.
The goal, NV Energy stated, is “to make sure all Nevadans have the facts about this risky and costly Constitutional Amendment, which has the potential to dismantle an electricity system that already provide[s] low costs, increased clean energy production, great customer service and industry-leading reliability.”
Nevada ranked seventh best nationwide on average for the lowest cost per kilowatt-hour, according to the U.S. Energy Information Administration’s state electricity profile. In 2016, the average retail price per kilowatt-hour in Nevada was 8.39 cents, according to the EIA. In February 2018, the average residential rate in Nevada was 12.5 cents per kWh; commercial: 8.15 cents per kWh; and industrial: 5.39 cents per kWh. The partially deregulated state of California’s average residential rate for the same month totaled 19.15 cents per kWh. Nationwide, the average residential rate was 12.23 cents per kWh.
Wells Rural Electric Co. is a nonprofit member-owned cooperative based in Wells that provides electrical service to approximately 6,000 rural customers over 10,000 square miles of Northeastern Nevada and part of Tooele County in Utah.
Nine other electric cooperatives serve the state and are members of the Nevada Rural Utility Association, according to the 2017 Status of Energy Report. The PUCN states that electric cooperatives are viewed as having a natural monopoly formed out of necessity. Wells Rural Electric Co. was founded in 1959 to provide electricity to parts of the state that investor-owned utilities would not serve.
“We serve the areas that nobody wanted because there was no money in it,” said Wells Rural Electric CEO Clay Fitch in a phone interview, “and we don’t see how that has changed dramatically over time.”
Today, the co-op operates as an electrical transmission and distribution provider that secures electricity for its members from the Bonneville Power Administration, which provides hydro power from generation stations along the Colombia and Snake rivers, plus small amounts of wholesale power from wind and thermal sources.
Through the cooperative model, members elect a local board of directors and own the infrastructure, which allows Wells Rural Electric to provide services at cost. The average residential rate with Wells Rural Electric Co. averages just over 9 cents per kilowatt-hour; of that, 3 cents is the actual cost of power and the rest the cost of delivery, Fitch said.
As the spokesman of Wells Rural Electric Co., Fitch is opposed to Question 3 for several reasons.
First, he said, a constitutional amendment does not recognize the cooperative business model as being different or allow for any utilities’ exemption. A legislative action rather than a constitutional amendment could allow co-ops to be exempt as they are in some cases. Although the ballot question promotes “choice,” Fitch said, it is “taking away our choice.”
Fitch advocated that electric co-ops already accomplish what the initiative aims to do: They provide reliable electricity from reasonably priced sources, encourage energy efficiency and are regulated. The co-op also offers products such as “smart” thermostats, offers net metering, has renewables in its portfolio, and promotes conservation.
“We would assert that we are already in compliance with the constitutional amendment,” he said, explaining the process would likely affect the co-op’s costs and cause them to surrender local control.
The PUCN investigatory docket states that if the ballot question passes, co-ops will not retain protected service territories and may exist as an aggregate community.
“It makes it more difficult,” Fitch said. “We will figure out a way.”
If the market opens to competition, companies like Direct Energy will begin marketing to Nevada’s electricity buyers.
“When you put this open-for-business sign on the border and say, ‘Please come in and provide energy to our consumers,’ you have people lined up to get their license,” Ross said.
Direct Energy does not own power generation facilities or delivery infrastructure. The company can supply electricity by securing contracts directly with generating sources then have it delivered to residences or businesses. Ross said packaging products and services – such as smart thermostats, understandable electric bills, energy conservation tips and home service packages – helps Direct Energy attract customers. In Texas, there are 40-50 similar companies vying for the state’s electricity customers, so companies must find ways to differentiate themselves.
“We try to bundle together smart things that people will want,” Ross said.
The business model behind Direct Energy, however, hinges on the passage of Question 3 in November. Without an open market, NV Energy has no incentive to work with a third party interested in purchasing directly from the power source, and power customers in monopoly territory, in most cases, do not have a choice of provider.
That gets back to the crux of Question 3: choice. If passed, the next question might be: Will Nevadans like their options?
“We want the power-generating sector to be fully competitive and operate in a liquid trading environment, a place where you can readily buy and sell power.” <&textAlign: right>— Ned Ross, RESA
Correction: This article has been changed to show that Direct Energy is a United Kingdom-based company.