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Nevada’s Attempt (and failure) to Deregulate

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What Nevada can learn from its attempt (and failure) to deregulate the energy

When Nevada voters head to the polls in 2018, they’ll be given the opportunity to fundamentally reshape the state’s energy market and end NV Energy’s monopoly control of electric service.

But what voters may not know is that Nevada came close to doing the same thing almost 20 years ago.

The state flirted with, but never consummated, a transition away from a standard regulated monopoly structure to a competitive, retail electric market in the late 1990’s and early 2000’s. Despite thousands of man-hours and countless hearings in front of the Legislature and Public Utilities Commission, state leaders ultimately backed away from the effort after watching California’s energy market implode and lead to mass rolling blackouts across the state.

But all of that aborted planning and work may not have been in vain — as Nevada policymakers have begun taking steps and looking to the state’s prior deregulation attempts to prepare for the possible passage of a ballot question that would require the state to adopt a retail energy market structure by 2023. The measure — backed by casino giants MGM Resorts and Las Vegas Sands, as well as former Sen. Harry Reid — passed overwhelmingly in 2016 by 72 percent to 28 percent, and few serious political opponents have emerged in the meantime.

Two attorneys with the state’s Public Utilities Commission — Hayley Williamson and Roman Borisov — gave a “history lesson” on the 1990s deregulation effort to members of the governor’s Commission on Energy Choice last week, and the work done nearly two decades ago by the commission will likely be revisited in the PUC’s newly opened investigatory docket studying the same subject.

Jon Wellinghoff, a former Federal Energy Regulatory Commission chairman and current advisor to the Energy Choice Initiative group backing the ballot question, estimated that in spite of the myriad of changes in the world of energy over the past 20 years, the earlier body of work done would shave about a year off the planning and preparation process if the ballot measure were to pass.

“It’s not like we have to look in a circle, 360 degrees, and figure out which way to move,” he said. “We know the path, we know the direction, we know what the general road looks like, but we have to now build that road up in a substantial way to make that road functional.”

Despite the vast changes in technology and energy policy over the last twenty years, many energy experts say that fundamentally the process — and pitfalls — of switching to a retail energy choice marketplace remains largely the same.

“It really does kind of feel like déjà vu all over again,” said Rose McKinney-James, a longtime energy lobbyist. “Except the external factors are a little different.”

History Lesson

Nationwide, almost all states that moved to a retail energy choice market took the steps to do so in the late 1990’s and early 2000’s — a time of faith in the power of markets and enhanced skepticism of monopoly models.

Nevada was not immune to these trends — a group of citizen advocates, including Wellinghoff, in 1993 attempted (and ultimately failed) to raise the funds necessary to purchase and transform Nevada Power, the state’s incumbent utility, into a customer-owned electric cooperative.

“It was all about really giving consumers choice, and giving consumers power and control,” Wellinghoff said. “So there was definitely not only the big guys having interest, but there was very much a grassroots citizen effort of people extremely interested in looking at how they could better control their energy costs and have more say in their energy decisions overall.”

The first official legislative steps towards a deregulated energy market came from a 1995 resolution — co-sponsored by a host of well-known lawmakers including future Gov. Brian Sandoval, then an assemblyman — calling for an interim study on the effects of competition in the generation, sale and transmission of electricity.

Unbeknownst to most, that 549-word resolution would kickstart a process that would dominate the next six years of legislative sessions and PUC proceedings. One of the first products of that resolution was a 360-plus page report produced by the state’s Public Utilities Commission, which after years of research, countless hearing and tens of thousands of pages in docket filings summed up thusly — “Implementation would be complicated, but achievable.”

“I think nobody had an appreciation for all of the work and detailed investigation and transformation, really multiple transformations that would have to take place across many sectors that would be able to successfully allow for that kind of transition,” Wellinghof said.

The initial, foundational legislation pushing Nevada to a deregulated energy marketplace was approved in 1997, laying out the foundational aspects of a retail energy market while setting a Dec. 31, 1999 start date for a retail energy market to open.

The bill instructed the state’s PUC to fill in the details, while giving a broad outline to how a competitive market would work — from the licensing and regulation of the new retail providers, how the market would be designed and overseen, spending on consumer education and protection and many of the issues current policy makers are grappling with.

In the meantime, the PUC took in testimony and input from a variety of sources pushing for a deregulated market — including a host of mining companies, the Southern Nevada Water Authority, the then-Steve Wynn owned Mirage resort and casino, the Nevada Test Site and Enron Corporation.

Another major bill approved in the 1999 legislative session expanded on portions of the 1997 legislation, including clarifying provisions on the role of a provider of last resort, delaying the retail market opening until March 2000 and allowing the governor freedom to delay restructuring.

Chris Giunchigliani, an Assembly member at the time, said that lawmakers had a difficult time sussing out the deregulation framework given the constraints inherent in Nevada’s 120-day legislative session and lack of expertise many lawmakers have with energy policy.

“You don’t really have time to process what you really need to process. That’s another reason I don’t like the 120-day cap — because if you mess something up, you’re stuck with it for two years, not being able to fix it,” said Giunchigliani, now a Clark County commissioner running for governor. “While the concept of deregulation is to make it easier for folks, (it’s) not when there’s small customers. Who’s out there to actually deliver this? How do you educate the public to make sure they even know how to figure out who their provider is? There was no guarantee on who the wholesaler was, let alone the retailer.”

For that and other reasons, policymakers stressed that flexibility was the key component to a successful deregulation effort.

“No one knows what the best structure in the industry can be,” the 1999 report stated. “The structure that makes sense today might not make sense in 5 years. We think the Legislature should neither mandate retail competition nor forbid it. The better approach is to authorize the Commission to require unbundling, if and when it can benefit Nevada’s customers.”

That flexibility would prove useful in the late 1990s and early 2000s, as the PUC decided to delay the opening of the retail market amid unanswered questions about how various aspects would be funded and as the incumbent utility — Nevada Power — sued to stop the process.

But the primary reason the state halted its push towards deregulation was one that for many residents of western states the defining energy event of their lives — the California electricity crisis between 1999 and 2000.

“That was the driving factor behind rolling this back,” Williamson said. “Watching the California wholesale market spike, and fluctuate, and be manipulated, and watching the rolling blackouts, watching the price of power, watching just an energy crisis. Governor (Kenny) Guinn said as much, he said, ‘Watching our neighbors next door, I can’t in good faith let this continue to happen.’”

Guinn announced a delay in the opening of the retail market to no later than September 2001, and a bipartisan policy committee he appointed to study energy issues recommended an indefinite halt to utility deregulation.

Lawmakers ultimately approved a pair of bills in the 2001 legislative session undoing the previous work and returning to a vertically integrated electric utility structure, which the state has kept ever since.

Wellinghoff agreed that the primary reason stopping the move to a retail market was the rapidly cratering California energy wholesale market, but staunchly denied that a similar situation could repeat in 2017 given changes to FERC’s oversight abilities. He listed several changes, including specific authority to target fraud and abuse, substantially larger per-day fines over violations and more than 200 individuals employed on the enforcement side, opposed to only 7 or 8 during the energy crisis.

“That particular situation is one that is more than unlikely to repeat itself,” he said. “In my opinion, in fact, it cannot repeat itself given that we have a completely different structure and much more robust and much more substantial regulatory oversight level than we did in 2000 and 2001.”

Despite all the work, few of the policy areas identified throughout the entire aborted deregulation process were fully fleshed-out by the end of the process. But many of Nevada’s major energy policy issues and topic areas that the state has dealt with over the last two decades — from a Renewable Portfolio Standard to a process allowing large energy users to leave the electric grid — were birthed during this time period.

Here’s a look at some of the aspects included in a retail energy market that policy makers grappled with in both the late 1990s and are again now.

Provider of Last Resort

In retail energy markets, regulators typically designate one electric service provider to take on the role of a “provider of last resort,” essentially a safety net for customers whose primary service providers goes out of business or who don’t wish to choose from a variety of retail options for electric service.

Under the legislation approved in the late 1990s, the “incumbent utility” (NV Energy) would have been assigned the PLR role immediately, and would require them to offer the services through an affiliate company after July 2001. The bill capped the rates that a PLR could charge over time, and would allow so-called “alternative suppliers” (retail energy businesses) to bid to become a full or partial provider of PLR services.

That model will likely be hard to replicate if the ballot measure passes — NV Energy CEO Paul Caudill has stated unequivocally that the utility has no desire to take on the PLR role, and will focus exclusively on becoming a transmission, “wires” company if the ballot measure comes to pass.

Nevada has several options on deciding a provider of last resort — it could bid out the rights to a retail energy company, or just assign the duties to a specific company.

Market Structure

While Nevada’s energy choice ballot question is rife with reference to competition, determining which aspects of the market can be open and competitive is and remains an open question.

The ballot language specifically lays out generation and the choosing of an electric provider as aspects of a competitive market, while providing that transmission services need not be deregulated to comply with the constitutional change. Otherwise, all aspects of energy markets aren’t specifically addressed — the initiative just states that its requirements be “liberally construed.”

The 1999 PUC report identified several areas of competitive service, including generation, billing and ancillary services, but warned that not all aspects would be best served by competitive markets.

“Our principle is a simple one: assign to the market those activities which the market can manage best; and assign to regulation those activities which markets cannot manage well,” the 1999 report states.

Wellinghoff said that advancements in technology — such as the advent of “smart” electric meters, distribution services, and advancements in data transfer technology — could open up additional sectors of the energy marketplace to competition.

“Our technologies, our capabilities and communications and the hardware and software have changed radically,” he said. “Because of that, it’s now possible to provide many more things competitively that couldn’t have been provided competitively back then.”

PPAs/Stranded Costs

While officially neutral, NV Energy has expressed some concern over how best to rid itself of more than $7 billion worth of long-term energy contracts beyond the 2023 start date for retail choice. Many of the contracts don’t have an exit mechanism or have an exit fee to end the service agreements early, and the company is concerned that some of its older agreements — made when the price of electricity was higher — could leave ratepayers or future market participants with a significant stranded cost.

The issue over stranded costs wasn’t a major problem in the late 1990s. Although the Legislature granted the PUC authority to determine and charge recoverable costs for the utility selling generation and other assets, the utility was able to bundle and actually bid off its generation assets above the book value, thereby avoiding any stranded costs. The sales never went into effect after Nevada decided to halt the deregulation process.

Dealing with long-term contracts was accomplished in a similar — a 2000 settlement with the state left the utility with an auction process to divest from long-term power purchase agreements, but no divestiture ever occurred before the state backed away from deregulation.

Energy markets have obviously changed in the succeeding 20 years, and Wellinghoff has questioned whether the value of those assets in the late 1990’s was accurate or a reflection of ongoing price manipulation.

“The question becomes whether or not those markets were artificially high, in part because of some of the manipulation that was going on that ultimately crashed those markets,” he said.

Regardless, policymakers both then and now understood the importance of figuring out a way to orderly force the incumbent utility to divest as a pathway to a fair and open competitive energy market.

“Competitors who are uncertain as to whether the utility must recover its past costs from future sales are less likely to invest in Nevada,” the 1999 report stated. “Uncertainty as to government policy is the enemy of orderly competition.”

Wholesale Markets

Policy makers have long grappled with questions as to how best to structure a future wholesale energy marketplace — broadly defined as the buying and selling of electricity between the point of generation and the end customer — in a retail energy environment.

Even in 1999, energy regulators were keenly aware that a successful retail market would require some form of an interlocal energy wholesale market.

“The interstate characteristics of the electric industry make interstate cooperation essential,” the 1999 report stated. “All forms of competition, including wholesale generation and retail services competition, will suffer without close cooperation among all market participants in surrounding states.”

Wholesale energy markets are typically required for retail electric providers to have the flexibility to purchase and sell electric power — no state has transitioned to a retail market without a Regional Transmission Operators (RTOs) and Independent System Operators (ISOs) — oversight bodies with names used interchangeably — in place.

Nevada’s proposed solution was to develop an interim, nonprofit state-based Independent System Administrator to hold down the fort for three to five years until the duties would be handed off to Desert STAR, a southwest-based ISO. The group — dubbed Mountain West — would have been composed of seven member classes and run by an advisory committee and independent board, but despite actually filing incorporation paperwork in 1999 failed to ever get off the ground largely due to disagreements on everything from funding to structure.

“There was never an agreement even on how many millions of dollars would fund the Nevada ISO,” Williamson said. “The amount of funding, where it was coming from, the final budget, who would pay for it, none of those questions over the four years ever seemed to have been resolved.”

Current members of the Governor’s Commission on Energy Choice have largely ruled out forming a state-specific ISO, given Nevada’s small size and likely high cost of doing so. The state could integrate with California’s Independent System Operator marketplace, or could look to form a southwestern-based ISO with current or new states participants.

Alternative Suppliers

One of the more developed aspects of the 1990’s deregulation effort was the system setup to license and regulate “alternative sellers” of electric service.

Under the proposed structure, the state PUC would license and regulate the sellers, and would monitor market conditions and other aspects to ensure no manipulation of markets was taking place.

These businesses would be allowed to participate in providing services that the PUC deemed competitive under a list of criteria including a lack of harm to consumers and would decrease the cost of providing service. Licenses would have been granted based on an analysis of each company’s history of safety, reliability of service, financial standing and billing and customer service. The fees to enter the market would be similar to the rates paid by incumbent utilities, which are based on gross revenue.

Because electric customers are used to having one electric service provider, the PUC would be allowed to extend up to $500,000 on consumer education and placed various minimum standards on disclosure and sales information.

Rural CO-OPs/Cities

The 1997 legislation specifically carved out exemptions for electric cooperatives — consumer-owned, non-profit entities that provide electric service to predominantly rural areas — from following the restructuring. It also exempted local governments or “small utilities” from following the restructuring laws as long as they did not apply to serve areas outside their traditional territory.

It also fully exempted the Colorado River Commission — a Nevada executive agency overseeing the state’s share of water and hydropower from the Colorado River — from being subject to the restructuring rules, and allowed it to remain vertically integrated.

It’s still unclear just how flexible the 2018 ballot question is in regards to electric cooperatives. A presentation by the Nevada Rural Electric Association noted that 14 other retail-choice states exclude or allow non-profit cooperatives from restructuring.

Renewable Portfolio Standard

A major political battle in the 2017 legislative session, the fight over whether or not to raise Nevada’s Renewable Portfolio Standard — a state-set minimum amount of energy that must be produced by renewable sources — was birthed during the initial deregulation bill.

A section of that 1997 legislation set the state’s first ever RPS at a relatively modest 0.2 percent by 2001, eventually rising to 1 percent over the next decade. That was raised to 15 percent during the 2001 legislative session (in a measure driven by Wellinghoff) and the state’s current RPS goal is 25 percent compliance by 2025.

Nevada policymakers ultimately approved a measure during the 2017 legislative session that would have raised the state’s RPS goal to 40 percent by 2030, but the bill was vetoed by Sandoval primarily over concerns that it would be “premature” given the coming “massive shifts in energy policy.”

Sandoval’s veto message also instructed the commission studying energy choice to include a higher RPS as part of the possible recommendations that group is charged with discussing and providing to the 2019 Legislature.