Sierra Pacific in the middle
May 30, 2002
The temptation is to feel a bit of sympathy for Sierra Pacific Power Co. and its stockholders, which this week saw the company’s request to raise rates slashed by the Public Utilities Commission of Nevada.
Sierra Pacific, as the middleman for most of the electricity it provides and the closest to the consumer, was caught in the squeeze when wholesale power prices went through the roof.
Company officials thought they were playing by the old rules, when whatever Sierra Pacific paid could simply be passed along to consumers. But in fact there was a whole new market being manipulated not so much by a shortage of electricity as by an overabundance of greed.
So when prices doubled and doubled again, Sierra Pacific like many utilities in the West continued buying power — “kept the lights on” — and fattened the wallets of energy traders, all the while assuming it would be the customers who made up the difference.
Now the PUC has shown how much the rules changed. No longer content to rubber-stamp rate increases, it stepped in on behalf of the consumer and said Sierra Pacific could have done a much better job of negotiating power contracts in a volatile market. The company tried to beat the market, and instead got left holding the bag.
While Sierra Pacific is taking a beating, much of the blame must rest with the giant energy trading companies who pocketed massive profits while leaving their own customers, like Sierra Pacific, twisting in the wind.
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The Bush administration also must share some of the responsibility, because when it stepped in to help California stabilize rates it failed to set the same controls on power prices throughout the West. If anything, the administration’s actions caused yet another spike in prices outside California and made a tough market worse for states like Nevada.
But it is the energy wholesalers who still have an opportunity to rectify the situation. After all, the market works both ways. If Sierra Pacific’s customers aren’t willing to pay the rates needed to keep the company solvent, then Sierra Pacific isn’t able to pay its wholesalers the rates they are demanding.
In open, unregulated business markets, it happens with some regularity. If Acme Widget’s customer is about to go out of business because production costs are too high, does Acme insist on keeping its prices up and risk losing its best customer? Sometimes, Acme lowers the price of widgets and helps its best customer survive a rough period.
Sierra Pacific isn’t going out of businesses, but market corrections can be made by wholesalers to keep the whole matter out of the courts. Why make a judge set the rates?
The billions made by energy companies during the “crisis” didn’t disappear (although in Enron’s case, it’s pretty hard to tell where it went). All they managed to do was wreck the economy for the rest of us. It’s time for the companies at the top of the energy-supply chain to realize those at the bottom simply don’t have the money to pay.
That’s the lesson in “prudency” taught this week by the PUC which, we hope, will carry through the entire energy market. We’re not going to pay ridiculous prices, so just forget about trying to charge them.
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