United States: Nevadans Overwhelmingly Give First-Round Approval To Deregulating The State's Power Production

Last Updated: November 10 2016
Article by Roman Borisov

The Energy Choice Initiative, State Question No. 3, received close to three quarters of the votes cast on Tuesday.  The question on the ballot read:

Shall Article 1 of the Nevada Constitution be amended to require the Legislature to provide by law for the establishment of an open, competitive retail electric energy market that prohibits the granting of monopolies and exclusive franchises for the generation of electricity?

Even though the proposal received overwhelming popular support, it is not the law of the land just yet.  To become effective, the measure must pass again in 2018 because it aims to amend the Nevada Constitution.  If the voters support the measure in 2018, the Legislature will be required to establish the legal framework for a deregulated energy-production market by July 1, 2023.  The measure does not contemplate opening to competition transmission and distribution of electricity.  Accordingly, should the measure pass in 2018, the state's current power monopoly, NV Energy, will transform into a wires company.

Primary supporters of the Initiative are Sheldon Adelson's casino company Las Vegas Sands and data center company Switch.  Prior to supporting the deregulation measure, both companies petitioned the Public Utilities Commission of Nevada (PUCN) to leave NV Energy's bundled service and were unhappy with the outcome.  Switch was the first large electricity consumer to seek unbundling from NV Energy in recent history.  Switch's attempt to exit resulted in a settlement with NV Energy, whereas Switch remained a bundled customer of the monopoly and NV Energy designated certain renewable generation sources to supply electricity to Switch's facilities.  Las Vegas Sands filed an exit application contemporaneously with two other Las Vegas casino operators – MGM and Wynn Las Vegas.  The PUCN conditioned the casino exits on hefty multi-million dollar upfront fees and presently incalculable non-bypassable charges.  The fees were meant to mitigate the effect of the departure on the remaining Nevada ratepayers.

Las Vegas Sands' upfront exit fee amounted to $24 million.  Unlike MGM and Wynn, Las Vegas Sands chose not to pay the $24 million exit fee and not to proceed with the exit.  Instead, Las Vegas Sands bankrolled the Energy Choice Initiative with $675,000 in contributions.  Switch, experiencing a buyer's remorse after the casino operators successfully exited NV Energy's bundled service, sued NV Energy and also contributed $1 million to support the Initiative.

To get the votes, proponents of the measure painted a rosy picture of the deregulated energy future: freedom to choose your electricity supplier, tens of thousands of new jobs, more renewable energy, and lower energy prices.  Nevada's metropolitan newspapers, the largest of which is owned by the family of Sheldon Adelson, supported the Initiative and recommended a "Yes" vote on Question No. 3.

Opponents of the measure include the Nevada State AFL-CIO and the International Brotherhood of Electrical Workers.  NV Energy remained neutral on the measure.  Opponents point to the absence of evidence demonstrating that deregulated markets create lower electricity prices.  They also note that NV Energy's rates are lower than in neighboring California and most of the rest of the country.

Nevada's residential and commercial customers indeed enjoy some of the lowest energy prices in the Intermountain West.  NV Energy's electric rates are also lower today than they were a decade ago.  NV Energy was able to decrease rates while pursuing one of the most aggressive renewable portfolio standards (RPS) in the country.  Renewable energy obtained via power purchase agreements from the likes of Ormat, Inc. (geothermal energy developer) and First Solar, Inc. (utility-scale solar developer) powers Nevada homes and businesses on a cost pass-through basis.  Stated differently, NV Energy earns no profit on renewable energy it purchases from geothermal and solar plants and sells to the public.  It will be a challenge for Nevada's deregulated market to obtain renewable energy at a cost lower than what the state-wide monopoly has been able to negotiate.

The Initiative was also promoted as a vehicle to allow residential customers with rooftop solar to receive fair value for the energy they supply to the grid.  Recently, around 30,000 Nevada rooftop solar customers were grandfathered into monthly net-metering rates that allow them to sell electricity back to NV Energy at full retail rates.  It will be a challenge for the deregulated market to match the economics these customers presently enjoy.  In fact, it is problematic to conceive a business model where a profit-driven energy broker would be interested in purchasing its customers' unwanted electricity at full retail rate while extending them otherwise the same terms as it does to its traditional, full-requirement customers.

If the voters approve the measure again in 2018, the Nevada Legislature will have a monumental task on its hands.  So far, the vote appears to show that the interests of Nevada's residential consumers are aligned with the interests of the state's largest energy consumers who chose to fund the energy deregulation initiative rather than pay multi-million dollar exit fees under the current legal framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Roman Borisov
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